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KNOXVILLE — The economy’s deterioration has led many people to believe the U.S. is headed for recession — if it’s not already in one.

Despite the risk, researchers at the University of Tennessee expect the economy to avoid recession but continue an economic slowdown in 2008.

That is among the findings and projections included in the annual Economic Report to the Governor of the State of Tennessee prepared by UT’s Center for Business and Economic Research (CBER) and released today.

Figures posted at the end of 2007 and beginning of 2008 — a weak national labor market in December, job losses in January, U.S. gross domestic product growth of only 0.6 percent in the fourth quarter of last year and reports of a weakening service sector — are a cause for concern.

“Tennessee, too, has seen a weakening of economic conditions, but to date there are few, if any, signs that the economy is actually contracting,” said Matt Murray, CBER associate director and project director who helped develop the forecast.

The report cautions an economic stimulus plan can be problematic. Congress recently passed a $168-billion plan that includes rebates for most taxpayers.

“Consumer relief would likely mean significant spending on imports, which would not help the domestic economy, while infrastructure investments might occur too late in the year to boost the economy. And, in general, any stimulus package will put upward pressure on inflation,” the report said.

Economic growth in Tennessee has been affected by the lagging national economy, but the good news is that growth is taking place.

The report says state job growth and income growth were weak, and the unemployment rate was higher in 2007. As with the national economy, the slumping housing market and residential construction industry are weighing down the growth.

The report includes sections looking at the U.S. economy in 2007 and for the future. For Tennessee, the report describes the current economic environment, the short-term outlook, the outlook for agriculture and the long-term outlook.

The report has a special section about recent changes in Tennessee’s welfare policies. A final section reviews the findings of “School-to-Work: Do Tennessee’s Higher Education Graduates Work in Tennessee?” Several installments of the study already have been released through CBER.

U.S. economy

The nation’s economy continued to slow in 2007 mainly due to the slumping housing market and banks tightening credit availability.

“The U.S. economy appears to be on shaky ground with some risk of recession in the near future. A relatively decent labor market, low interest rates and controlled inflation have all contributed to slow but stable spending by businesses and consumers. However, economic conditions deteriorated toward the end of 2007,” according to the report.

One of the most widely used indicators of overall economic health, inflation-adjusted gross domestic product, grew at an annual rate of 0.6 percent in the last quarter of 2007. GDP growth for all of 2007 is expected to only be 2.2 percent, the lowest since 2002.

The housing market, crippled by the fallout from the subprime mortgage situation, showed no signs of turnaround in 2007. The pressures on the housing market are likely to continue into 2009.

Overall, the economy will grow in 2008 but at a slower rate than late 2007.

Tennessee’s short-term economy

The state’s economy weakened in 2007, and less growth is expected for 2008. Some increase in growth is forecast for late in the year.

“Stronger growth is expected to re-emerge when the national housing market begins its turnaround in the final quarter of the year. A delayed housing rebound would delay a return to stronger growth in Tennessee,” according to the report.

Employment growth varies across the state with the best conditions centered in and around metropolitan areas. There were 45 counties with non-farm job losses or no employment growth between June 2006 and June 2007.

The struggling manufacturing sector, which had plants and workers decline in 2007, will get little relief in the short term.

The state unemployment rate hit a low at 4 percent in August but climbed to 5.3 percent in December. The unemployment situation is expected to improve by the middle of 2009.

Tennessee’s long-term economy

Taking into account historic economic trends in Tennessee, the state’s economy is expected to grow slowly in the years to come.

One major factor in the economy is the labor force available in the state, and that is expected to grow more slowly because of the slower-growing population and the retirement of baby boomers.

“Many employers in Tennessee today have difficulty finding and retaining skilled workers. The long-term outlook suggests that this problem will become more acute in the next 10 years, which could hamper the state’s path of economic development,” the report states.

The state unemployment rate is expected to be about 5 percent after 2009.

Welfare watch

A section on welfare in Tennessee discusses the most significant changes in state policy that were required to align the program Families First with federal rules.

Now there are limitations on education and training for recipients, and a change in time limits means families can receive assistance for 60 months straight if they meet certain requirements.

The report discusses the concern that dependency on the program could increase.

School to work

The final section in the report discusses “School-to-Work: Do Tennessee’s Higher Education Graduates Work in Tennessee?” CBER is leading the multi-part project under an agreement with the Tennessee Higher Education Commission and with the cooperation of the Tennessee Department of Labor and Workforce Development. The reports released so far are available at

A better educated workforce can greatly enhance economic development. In 2005, there were nearly 120,000 people who graduated from public higher education institutions in Tennessee between 1997 and 2005 working in the state. The percentage of graduates remaining in the state to work declines over time, but new graduates replace them.

The “School-to-Work” reports discuss labor force participation rates and wages of different degrees and among graduates from Tennessee Board of Regents and University of Tennessee system schools.

To view or download the entire Economic Report to the Governor of the State of Tennessee, go to


Matt Murray, (865) 974-6084,

Elizabeth Davis, UT media relations, (865) 974-5179,