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KNOXVILLE — Tennessee’s economic slowdown will turn around in the last half of 2002 but the recovery will be very slow, a University of Tennessee Economic Report to the Governor says.

Dr. Matt Murray, the UT economics professor who oversees the report, said U.S. and state economic growth has been slowing since last March but should begin to rebound no later than July 2002.

“The third quarter 2002 will represent a turning point for the national and the state economy,” Murray said. “Some measures of economic activity may have already bottomed out. Good evidence of improving economic conditions is the expansion in U.S. gross domestic product reported for the fourth quarter of 2001.”

Murray said the Federal Reserve Board’s Jan. 30 decision not to lower interest rates adds credence to the report’s conclusion.

“The Federal Reserve’s sense is that the economy has nearly bottomed out,” Murray said.

However, pre-existing downward pressure will cause a continued slide in Tennessee’s economic growth rate for the next few months, the report says.

The 2002 forecast for state taxable sales growth is only .5 percent but is expected to rebound to 2.3 percent in FY 2003.

“Taxable sales and sales tax revenues are likely to remain rather weak into the next fiscal year,” Murray said. “We expect to reach a turning point in the third quarter of the year, but not a sharp rebound in economic activity. It will take place slowly over many months extending well into 2003.”

The report predicts job growth — already a weak .5 percent in 2001 — will slow even further to .1 percent in 2002, led by a 3.2 percent loss in manufacturing jobs. Job growth is expected to improve to 1.5 percent by the end of the year.

State unemployment, currently below 5 percent, will peak at 5.6 percent before slowly improving in 2003, the report says.

The report predicts Tennesseans will fall further behind other U.S. residents in per capita income. By the close of 2003, state per capita income will be about 86 percent of the U.S. average, down from 91 percent in 1995.

“One of the most disappointing economic phenomena noted in the report is Tennessee’s per capita income growth,” Murray said. “Since 1996, the disparity between Tennessee and the rest of the nation has widened.

“Tennesseans’ earnings are increasing over time, but our national counterparts are seeing income grow at a faster pace.”

The state and U.S. economic slowdown already had started Sept. 11, but the terrorist attacks exacerbated the situation, the report says.

Murray said increased consumer purchases of durable goods such as automobiles, appliances and furniture and more construction activity will help drive the state’s economic recovery.

“Sept. 11 aggravated and amplified what was already looking to be a recession and economic slowdown,” Murray said. “Consumer spending continued to move forward even after Sept. 11. That kept the economy from slowing even further.

“Similarly, we need investor sentiment to improve and more investment in commercial enterprises, industrial facilities, plants and equipment, and so on, which translates into taxable sales and sales tax revenue growths.”

The UT report also cites education as a key to Tennessee’s long-term economic future.

“If we do not make the investment in education, our economic performance will suffer substantially,” Murray said. “More investment in education does not guarantee economic success, but economic failure is a certainty if we do not make that investment.”

The Economic Report to the Governor is compiled annually by UT’s Center for Business and Economic Research. The Tennessee departments of Economic and Community Development, Revenue, Labor and Workforce Development, and Finance and Administration co-sponsor the report.