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KNOXVILLE — A $328 million drop in taxable sales and rising unemployment slowed Tennessee’s economy in March, a University of Tennessee report says.

UT’s latest index of leading economic indicators, which uses recent data to predict economic growth for the near future, dropped 2.8 percent in March.

UT economist Matt Murray said state economic growth continues to be volatile but good. It could slow more as recent Federal Reserve interest rate hikes take effect, he said.

“You have be a little bit concerned about where the economy is going,” Murray said. “All the fundamentals are there to sustain economic strength through the year, but the index in March slipped, and interest rate increases certainly will slow the economy down.

“Hopefully, the March index numbers are not a signal for a broader downward trend in economic growth for the state’s economy.”

Murray said the index has fluctuated in recent months: up 10 percent in December, down 3 percent in January, up 8 percent in February, and down in March.

Economies of the state’s largest cities also are volatile, he said. After surging in February, they fell in March 14 percent in Knoxville, 9 percent in the Tri-Cities, 8 percent in Chattanooga, 3.4 percent in Nashville, and 3.1 percent in Memphis.

The up-and-down cycle may signal slower economic growth in the future, Murray said.

“When the economy begins moving more slowly you expect the index to move from month to month in an up-and-down direction as it has for Tennessee in the last year,” Murray said, “but you need to see at least three months downward movement in the index before you can have a clear signal that the economy is moving closer to a recession.”

On a positive note, state manufacturing hours, construction jobs, and the U.S. leading index all rose slightly in March.

Despite 29,100 new unemployment insurance claims, the state’s 3.5 percent unemployment in March was lower than the nation’s.

Also good news for Tennessee is that much of the state’s growth does not occur in interest-sensitive areas such as automobile sales, Murray said.