KNOXVILLE — While many aspects of the Tennessee and national economy are on the upward trajectory, others are lagging—creating a perfect recipe for modest growth.
The forecast in the spring 2011 Tennessee Business and Economic Outlook, a report prepared by the Center for Business and Economic Research (CBER) at the University of Tennessee, Knoxville, shows that most aspects of the state and national economies are rebounding but will not reach pre-recession levels until 2013 or 2014.
“While oil prices are easing, employment is gaining, exports are growing, automobile sales are rebounding, and business investments in equipment and software remain healthy—housing, business structures, and government spending are putting a downward pressure on national economic growth,” explained Matt Murray, CBER associate director and author of the study.
In Tennessee, the unemployment rate will see a slight dip, and most job sectors will see growth, along with personal income and sales tax revenue, but the housing market will continue to be stuck at the bottom.
This year, the world has watched petroleum prices fluctuate, leading to higher prices at the pump. Murray predicts prices will remain high due to simple supply and demand and that factor will continue to eat into household disposable income and consumer spending.
However, Murray also predicts another closely watched item—core inflation—will be stable and lie within the Federal Reserve’s comfort range into 2013. This means consumers’ spending power will remain largely intact. Core inflation excludes food and energy prices, which are expected to remain volatile.
Here are some of the major themes in the spring report:
Employment
Tennessee’s unemployment rate will fall from 9.7 percent in 2010 to 9.4 percent this year. A further drop to 8.7 percent is expected for 2012. The national unemployment rate was 9.6 in 2010 and will drop to 8.8 in 2011. The nation’s lower unemployment rate can primarily be attributed to a decline in the number of unemployed workers and a shrinking labor force.
Luckily, the state labor market is finally showing some growth for which people can find job opportunities.
“This is good news compared to the 0.3 percent setback in 2010 and the 5.6 percent collapse in 2009,” Murray wrote. “The anticipated job growth for 2011 and 2012 is encouraging news for the state economy.”
Durable goods employment—particularly in areas of primary and fabricated metals, transportation equipment, and machinery—expanded and will continue to do so. Nonfarm employment will expand by 1.1 percent this year and 1.3 percent next year.
“Natural resources, mining, and construction will enjoy strong growth this year, reflecting an initial rebound from the deep depths of the recession,” wrote Murray. “Education and health services, which were largely immune to the recession, will also experience strong growth.”
Jobs that won’t see growth include Tennessee’s government jobs at all levels. Federal employment will contract due to the end of the census, as will employment at the state and local levels due to tepid revenue growth. Nondurable goods employment will contract and continue to struggle. Jobs in computers and electronic equipment, along with printing, will also witness sharp losses this year.
Growth in the state’s manufacturing sector will be flat this year, which is an improvement over 2010, which saw a 2.5 percent setback, and a 14.2 percent decimation in 2009. The industry is being helped by the resurgence of automobile sales and Volkswagen’s new operation in Chattanooga.
State tax revenues
The recession placed ongoing strains on federal, state, and local government budgets across the nation because of dismal tax revenues with the sales tax being particularly hit the hardest.
“This poor performance reflects massive job and income losses, as well as reduced construction within the business and residential sectors,” wrote Murray.
However, states are finally beginning to see some growth in the sales tax arena. Tennessee has seen growth for thirteen consecutive months. In the first quarter of 2011, the state saw a growth rate of 5.6 percent, which is in line with the national average. While the recent gains are an improvement over previous quarters’ growth rates, they are not at the level of peak years.
Taxable sales will advance 4.8 percent in calendar year 2011, with automobile sales and manufacturing purchases as major drivers of this growth. Fiscal year 2011-12 will bring forth slightly stronger sales tax revenue growth of 4.7 percent (compared to 4 percent in the current fiscal year) with most broad categories of taxable sales showing improvement.
Housing market
Tennessee’s housing market hit rock bottom in late 2008 and early 2009, and there is not yet an indication as to when it will climb out of the hole. For example, foreclosures moved down in the third quarter of 2010, only to jump back up the following two quarters.
“The glut of homes on the market, along with the queue of homes in the foreclosure pipeline, will continue to slow the housing market rebound,” said Murray. “There has yet to be signs of a sustained turnaround.”
Furthermore, there has been little if any sustained increase in permitting activity in Tennessee, indicating weak housing starts. In contrast, national housing starts will be up this year—despite existing home sales being “nothing less than miserable.”
Personal income
Tennesseans will continue to take home more money.
Nominal personal income—the sum of wage and salary disbursements, proprietors’ income, personal dividend income, personal interest income, and transfer payments to persons—in Tennessee will increase 4 percent in 2011 and 4.4 percent in 2012.
However, rent, interest, and dividend income will show improvement over 2010 but will nonetheless prove to be a drag on overall personal income growth. Rental income may do well as people move to rentals as opposed to buying homes. However, low interest rates will continue to depress interest income.
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.
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C O N T A C T :
Matt Murray, (865-974-6084, mmurray1@utk.edu)
Whitney Holmes, (865-974-5460, wholmes7@utk.edu)