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KNOXVILLE — Tennessee’s economy started the millennium slowly but will improve through mid-year, a University of Tennessee report says.

UT’s latest index of leading economic indicators for Tennessee dropped 3.7 percent in January, after increasing the last two months of 1999.

“It was the sharpest dip since May 1999,” UT economist Matt Murray said, “but I expect the state’s upward economic trend to continue over the long term.”

The index reports unemployment claims up 56 percent, taxable sales down 35 percent, and construction jobs down 12.6 percent.

The unemployment data is tempered by the state’s low 3.5 percent overall unemployment rate, Murray said.

“The key thing to remember is that state unemployment remains remarkably low,” Murray said, “so despite the sharp jump in unemployment claims, the overriding statistic is the overall unemployment rate itself, which remains remarkably low and is an indication of the very strong health of the Tennessee economy.”

The drop in taxable sales may have been a reaction to overspending in December and does not indicate a sustained reduction in sales tax revenues, Murray said.

“It could be that consumers stocked up in December in anticipation of Y2K problems and in January had to retrench,” Murray said. Those kinds of unique circumstances are difficult to predict and understand.

“Sales tax revenues in other months have been reasonably strong, so I would not take much stock in one month’s fall in taxable sales.”

The index, compiled by Murray in UT’s Center for Business and Economic Research, analyzes data from the recent past to forecast economic conditions six to nine months in the future.