KNOXVILLE— Tennesseans are in for the long haul and likely won’t see significant improvements in the state’s economy until 2013.
Many aspects of the economy, however, are showing some gains in the short-term, which is good news particularly in the areas of employment, personal income, sales tax, and state tax revenue, according to a University of Tennessee, Knoxville, report released today.
However, the housing market will continue to struggle, according to the fall 2011 Tennessee Business and Economic Outlook. The economy could also face a number of downside risks in the months ahead, including the looming financial crisis in Europe.
The study, prepared by the UT Center for Business and Economic Research, predicts the trajectory of the state and national economies by examining several economic and fiscal factors.
“Economic growth has slowed but has not stalled,” wrote Matt Murray, CBER associate director and author of the study. “A slight pickup in growth is anticipated in the third and fourth quarters, but annualized growth will come in at a disappointing rate for the year as a whole. The outlook for 2012 is only slightly better.”
Tennessee’s short-term economic outlook has been downgraded because of slower growth prospects nationally and internationally.
Here are some major themes in the fall report:
Employment
Tennessee’s unemployment rate will surpass the national rate in the short-term.
It will average 9.8 percent in the third quarter and 9.7 percent in the fourth. The 2012 projection is 9.4 percent. It’s not expected to dip below 9 percent until 2013.
The nation’s unemployment rate was officially 9.1 percent in August, which was an improvement over the 9.6 percent rate in 2010.
The national unemployment rate will also remain above 9 percent this year and next year.
Tennessee’s nonfarm employment is expected to be up 0.8 percent this year and 1.0 percent in 2012, down slightly from expectations in the spring.
Manufacturing will enjoy short-term employment gains particularly in the durable goods sector. This is largely due to steady improvement in the transportation equipment industry, including new jobs created by Volkswagen. However, manufacturing will not regain all of the jobs lost during the course of the recent recession.
Nondurable goods will decline 0.2 percent this year. The textiles and printing industries will see “especially large losses,” Murray wrote. Plastics and rubber, on the other hand, will enjoy healthy growth benefiting in part from the pickup in transportation equipment production.
Most sectors of the economy outside of manufacturing are expected to see job gains in the quarters ahead. Exceptions for 2011 include retail trade, information, and government, including federal, state, and local employment.
In 2012, retail trade and the government areas will likely continue to lose jobs while other sectors expand.
Nationally, “employment is not only below pre-recession levels but below the level of employment that prevailed in 2000,” Murray wrote.
U.S. payroll employment is expected to grow 0.9 percent this year and 1 percent in 2012. However, employment will not return to 2008 levels even by the end of 2013.
Tax collections
Tennessee’s sales tax revenues for the July 2010 through March 2011 time period fared better than the southeastern average.
Total tax revenues grew 6.3 percent compared to 2010, and sales tax revenues grew by 4.6 percent. While both numbers were above the southeastern average, they were below the national average.
The second quarter of 2011 compared to the same period in 2010 showed positive growth for Tennessee. The total growth was 3.3 percent over 2010, and sales tax growth was up 5 percent. Tennessee’s sales tax grew more than the southeastern average in the second quarter of 2011 over 2010.
This is the second consecutive August with positive sales tax revenue growth which moves collections to just $9.5 million below August 2007.
State governments are finally seeing some relief from the recession. Recovery, in terms of tax revenue growth, is “quite strong,” Murray wrote.
Year-over-year growth in the second quarter of 2011 compared to 2010 was the strongest states have seen since 2005. It was 11.4 percent. The first and second quarters of 2011 show continued state tax revenue growth throughout the nation. Though revenues have been positive for six consecutive quarters, collection levels are still below pre-recession figures, including Tennessee.
Local governments are not as lucky.
Due to weak property tax revenues, which account for more than a quarter of local tax collections, state and local collections have seen losses for two consecutive quarters nationwide. Compared to the same quarter in the previous year, property taxes fell by 1.7 percent in the first quarter of 2011 and 3 percent in the fourth quarter of 2010, reflecting the declines in property values during the past two years.
“Unfortunately, the worst is not likely over for local governments,” Murray wrote.
Personal income
Tennesseans will have a bit more money this year.
Personal income is expected to grow 4.6 percent in 2011, thanks in part to the temporary two percentage point reduction in the Social Security payroll tax.
Rent, interest, and dividend income should see strong growth of 5 percent.
A 4.3 percent income growth rate is expected in 2012, one more illustration of slow economic expansion.
Nationally, nominal personal income is expected to increase 5.3 percent in 2011, but it will not be evenly distributed across all socio-demographic groups.
Housing market
Home values in Tennessee and the nation are expected to keep falling through 2011. Existing home sales will remain low and national home prices will drop 5.2 percent for the year, the report states.
“Foreclosures are expected to be up in 2011 after a respite in 2010,” Murray wrote. “The depressed state of the housing market will limit job creation in the construction, building material, and home furnishing sectors, while putting downward pressure on the sales and property tax bases of states and localities.”
Investment
Murray called nonresidential fixed investment “an important bright spot” for the national economy.
Following 4.4 percent growth in 2010, investment spending is expected to rise 7.8 percent this year and 4.3 percent next year. Equipment and software investment will show broad-based gains. Investment in structures, however, will see only 3.2 percent growth in 2011 and a 3.5 percent setback in 2012.
“This weak performance for structures is nonetheless marked improvement over the double-digit declines in 2009 and 2010,” Murray said.
To see the report in its entirety, visit http://cber.bus.utk.edu/tefs/fall11.pdf.
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 S:
Matt Murray (865-974-6084, mmurray1@utk.edu)
Lola Alapo (865-974-3993, lola.alapo@tennessee.edu)