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KNOXVILLE — It will take years for the U.S. and Tennessee economies to recover, and they may never look quite the same as they did before the recession. Still, they are recovering.

This is the forecast in the 2011 Economic Report to the Governor, an annual report prepared by the Center for Business and Economic Research (CBER) at the University of Tennessee, Knoxville.

“While recessions are a natural part of the business cycle, the length and depth of the current cycle has been unprecedented. The decade ahead will represent a period of significant adjustment and restructuring for both the state and national economies,” said Matt Murray, CBER associate director and author of the study.

The state’s economic performance will generally mirror the national economy in the quarters ahead with the economic outlook for 2011 looking the brightest since 2006. Unemployment numbers will dip, private sector jobs will grow and sales revenue will rise. Economic growth will be even stronger in 2012.

The report notes that the Great Recession has created long-term consequences for national and state economic performance. Some measures of economic activity like the unemployment rate will take years to recover, while others like housing starts may not fully rebound even by the end of the decade. While the long-range economic outlook to 2020 is largely positive, the national and state economies will undergo a slow and long period of adjustment and transformation in the years ahead.

Here are some of the major themes in this year’s report:

Employment:

Tennessee’s employment levels are improving, but at a slow pace and are not expected to return to pre-recession peaks until 2014. Nonetheless, the state will see job growth of 1.3 percent in 2011.

After averaging 10 percent in 2010, the unemployment rate will slip to 9.1 percent this year and fall further to 8.8 percent in 2012. That’s better than the national unemployment rate, which is expected to be 9.3 in 2011.

Many of the jobs in greatest demand today did not exist 10 years ago in Tennessee, while jobs once in great demand continue to slide. Manufacturing will see modest gains over the next couple of years and then return to its trend of job losses in 2014. Jobs in textiles, printing and paper subsectors will also be shed. Other sectors like professional and business services will see especially healthy growth.

Sales Tax Revenue:

With more money to spend, the state is finding more sales tax revenue in its coffers — after two consecutive years of decline. Last year, taxable sales grew only 2.6 percent, but sales are expected to grow 5.2 percent in 2011 and 4.5 percent in 2012.

Automobile sales are aiding in the recovery with a 12.3 percent gain last year, and an expected 9 percent gain this year.

“Tennessee and states across the nation are finally experiencing positive revenue growth, but this growth is emerging very slowly. Revenues in Tennessee are forecast to continue to expand but will not likely reach prerecession levels until at least fiscal 2012-2013,” wrote Murray.

Healthy sales tax revenues are especially crucial as the funds provided to states through the American Recovery and Reinvestment Act of 2009 are expended by June 30. States including Tennessee will no longer be able to plug budget holes with the extra funds in the next fiscal year.

“The absence of stimulus dollars puts states in a position of tight budgets with pressures to raise taxes and impose further spending cuts,” the report states.

Housing Market:

The sight of foreclosure signs are still not behind us. Foreclosure rates are expected to remain elevated in Tennessee, with an additional spike likely to take place in this current quarter of the year.

This will ultimately be a blow to an already hurting construction industry.

“Loans in foreclosure ultimately lead to more houses on the market, depressing construction activity and prices. This means less construction sector employment, fewer building material purchases and downward pressure on taxable sales and sales tax collections,” wrote Murray.

Meanwhile, property values are falling, aggravating the budget situation for cities and counties which rely heavily on property tax revenues. Property tax lags other revenue sources because of a time delay in putting new property values on assessment roles. This puts extra stress on cities and counties that rely on the property tax base to fund government.

Fortunately, the worst appears to be over for the state’s construction sector. The decline of building permits has reversed, which bucks the national trend that has only slowed.

Personal Income Growth:

As employment increases, so will people’s incomes.

Nominal personal income — the sum of wage and salary disbursements, proprietors’ income, personal dividend income, personal interest income and transfer payments to persons — is expected to grow 4.5 percent in Tennessee this year, compared to 4.9 percent growth for the U.S.

“Tennessee’s growth will accelerate in 2012 as employment growth improves, thus pushing wage and salary income forward at a more robust rate,” wrote Murray.

Agriculture:

Excessive drought in some areas of Tennessee and torrential rains in others provided a challenge for farmers in 2010. Still, crop farmers are faring better than their livestock counterparts. Because of high crop prices in 2009, crop production accounts for 60 percent of the state’s agricultural receipts, while livestock accounted for 40 percent. Typically, crops and livestock each account for equal portions.

The inequality could hurt the livestock industry.

“If the high crop prices seen in late 2010 continue into 2011, it could be another good year for Tennessee crop farmers but will put pressure on the livestock sector as higher crop prices increase input costs for livestock producers,” wrote Murray.

In 2009 agriculture-related activities accounted for 10.5 percent of Tennessee’s economy, down from 11.4 percent. However, the state’s investment in biofuel research continues to hold out promise for agriculture’s future and puts Tennessee at the forefront of the production of renewable energy.

To see the report in its entirety, visit http://cber.bus.utk.edu.

The report was financed by the state Department of Finance and Administration, the state Department of Economic and Community Development, the state Department of Revenue, the state Department of Labor and Workforce Development and the Appalachian Regional Commission.

CONTACT:

Matt Murray, (865-974-6084, mmurray1@utk.edu)

Whitney Holmes, (865-974-5460, wholmes7@utk.edu)