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KNOXVILLE — Tennessee’s economic growth is slowing rapidly but a recession remains unlikely, a University of Tennessee economist said Thursday.

Dr. Matt Murray said the state’s monthly index of economic indicators suffered its biggest slump of the year in October, falling 8.8 percent.

The index, which uses recent data to predict economic conditions in the near future, shows October taxable sales dropped $249 million; unemployment insurance claims increased more than 6,900 to 39,323 claims, the most since January 1997; state manufacturing jobs dropped to a 10-year low; and the U.S. leading index fell 3.4 percent to its lowest level of the year.

Despite October’s poor performance, recession is not in the forecast, Murray said. Overall state employment remains strong at 3.7 percent, he said. Though slow compared to recent economic growth, Tennessee’s economy remains relatively healthy, he said.

“Chances of a recession are quite small at this point in time,” Murray said. “The most likely scenario is a soft landing for the state’s economy.

“I don’t want to be overly optimistic, but we have to remember that the previous year was a banner year for many retailers because of Y2k buildup and very strong economic growth.”

Murray also expects the Jan. 4 Federal Reserve interest rate cut to boost the economy in months ahead.

“Generally it takes 6-8 months for interest rate changes to fully impact the economy,” Murray said. “So the rate cut this month will help buoy the economy in late summer or fall.

“I expect the Fed to lower rates at least once or twice more this year, which would help prop up the 2001 economy.”

Employment is a key component to watch in months ahead, as companies anticipating a recession could fuel an economic downturn through layoffs and hiring freezes, he said.

“There is anecdotal evidence that employers have decided to cut back on employment and hiring in anticipation of a slowdown,” Murray said. “That can make the slowdown a self-fulfilling prophecy. If the economy fails to create jobs, consumers lose purchasing power and spending drops.

“It is a frustrating trend, but if businesses expect a continued economic slowdown through 2001, they will try to protect their financial positions by not hiring.”

The Tennessee monthly index of economic indicators is compiled by UT’s Center for Business and Economic Research.