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KNOXVILLE — Tennessee’s economy continued to show improvement in the last year, the University of Tennessee’s 2005 Economic Report to the Governor says.

The report says the one remaining area of concern is job growth.

Dr. Matt Murray, the UT economist who directed the study, said the Tennessee economy should see modest overall improvement in 2005 and 2006.

“Unemployment rates have fallen and income growth has been relatively strong,” Murray said. “The state’s economy continues to expand since the 2001 recession, but we’ve not recovered all of the ground lost during that downturn.”

The report says the total amount of personal income in Tennessee rose 5.2 percent in 2004, and should rise 5.5 percent in 2005 and 5.4 percent in 2006.

On a per-person basis, income growth in Tennessee is expected to be less than the national rate in 2005 and 2006.

Murray said nonfarm job growth in 2003 was only 0.1 percent, which improved to 0.9 percent in 2004. Growth in service sector jobs made up for a 1 percent loss in manufacturing.

The report predicts a 1.5 percent increase in job creation in 2005 and 1.8 percent in 2006, with growth in the durable goods and construction sectors making up for continued losses in nondurable goods.

“We’re not sure why job growth hasn’t improved more by now,” Murray said. “Typically, following a recession, you get a strong rebound in job creation. This recovery didn’t show much job growth at all.”

Murray said possible explanations include concerns over the conflict in Iraq, the flood of imported goods from China and other developing countries, and strong U.S. productivity gains that allow more goods and services to be produced with fewer workers.

The report says Tennessee’s unemployment rate should hold steady at 4.9 percent in 2005, with a slight drop in 2006 to 4.8 percent. This is less than the national jobless forecast of 5.3 percent for both years.

Murray said the state’s economy has dramatically restructured itself in the years since the end of World War II, moving from agriculture to manufacturing, and now to the service sector. This change affects state-wide job creation, he said.

“What we’re seeing in this transformation is a geographic pattern to job gains and losses,” he said. “The service sector, which is growing, is mostly concentrated in the metropolitan areas of the state, while manufacturing is mostly located in rural areas.

“So when services grow, that disproportionately benefits metro areas, and when manufacturing declines, it hurts rural areas the most.”

Taxable sales grew 3.5 percent in 2003 and 5 percent in 2004, with expected gains of 5.3 percent in 2005 and 5.4 percent in 2006. Improvement has been slow due in part to the weak pace of job creation.

The long-term outlook for Tennessee includes personal income growth of 5.6 percent annually between now and 2014, compared to 5.9 percent for the nation.

Nonfarm jobs in the state should rise at 1.8 percent in the long term, and average incomes per person will rise 4.2 percent.

Unemployment in Tennessee should stay below the national rate, falling from 4.9 percent in 2005 to 4.1 percent by 2014. The national rate will drop from 5.3 percent in 2005 to 4.6 percent by 2014.

The 2005 Economic Report to the Governor of the State of Tennessee is the 29th in a series of annual reports compiled by UT’s Center for Business and Economic Research. It can be read online or downloaded from the CBER Web site, http://cber.bus.utk.edu/tefslist.htm.

The report is published, distributed and financed through the Tennessee Department of Finance and Administration, the Tennessee Department of Economic and Community Development, the Tennessee Department of Revenue, the Tennessee Department of Labor and Workforce Development, and the Appalachian Regional Commission.

Its primary purpose is to provide the most current economic analysis possible to planners and decision-makers in the public and private sectors.