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The US and Tennessee economies continue to dig their way out from the Great Recession, but they will be digging at a slower pace this year than last.

The debate over the nation’s debt ceiling, the looming risk of sequestration of federal spending, and the payroll tax increase contribute to the slowdown in predicted gains, according to the forecast in the 2013 Economic Report to the Governor of the State of Tennessee, released today.

The study, prepared by the UT Center for Business and Economic Research (CBER), predicts the trajectory of the state and national economies by examining many economic and fiscal factors and trends.

“The U.S. economy is projected to continue to grow in the quarters ahead and the unemployment rate will continue its slow but steady decline,” said Matt Murray, CBER associate director and the report’s author. “For Tennessee, the economic outlook calls for modest growth in 2013 followed by substantially stronger growth in 2014.”

Several good signs for the nation’s still fragile economy are the rebound of the housing sector and tangible contributions from the construction and manufacturing sectors in job growth. Manufacturing jobs will be up for the third year in a row after thirteen years of contraction.

The expiration of the payroll tax cut is one of the most significant factors that puts downward pressure on consumer spending and overall economic growth for our state and the nation.

“To put it in perspective, for a Tennessee household earning $50,000 per year, this translates into a tax increase of $1,000,” said Murray. “It is expected that the payroll tax increase will have a significant negative effect on taxable sales for the year.”

For the US economy, inflation-adjusted gross domestic product is projected to grow only 1.7 percent in 2013, down from 2.3 percent growth in 2012. The unemployment rate will stay relatively flat this year, ending around 7.6 percent, just 0.2 percentage points down from its current level. Inflation is projected to remain benign and average under 2 percent over the next few years, despite interest rates being kept at historically low levels by the Federal Reserve.

Murray noted that while the last-minute cliff package averted large economic setbacks, continued positive growth is reliant on finding solutions to the nation’s fiscal woes.

“There is still much uncertainty clouding the outlook of the economy,” he noted. “The last-minute action helped avert tax hikes and drastic spending cuts, but it failed to address the core issue of how to bring the nation’s deficit and debt under control.”

Tennessee economy

Tennessee can expect slow growth this year, followed by stronger growth in 2014, according to the report.

This year and next, the state’s unemployment rate will drift down but remain above pre-recession levels. The state’s annual rate for 2013 is expected to be 7.9 percent. The rate will improve to 7.5 percent next year, according to the report.

Other findings:

  • Nonfarm employment should advance 1 percent in 2013 and 1.7 percent in 2014.
  • Employment growth in manufacturing will slow from the heated pace of 2012 but still see healthy growth of 1.2 percent; gains in durable goods manufacturing will more than offset losses in nondurable goods manufacturing.
  • Natural resources, mining, and construction, along with professional and business
  • services, will enjoy the strongest rates of growth in 2013. Information and financial activities are expected to perform poorly.
  • Tennessee’s labor force will contract again in 2013, but only by a small amount. The number of employed people will improve slightly while the number of unemployed will fall by 2.2 percent. Substantial improvement is expected in 2014.
  • The housing market is on the rise in Tennessee. Nashville-area Realtors reported a 20 percent increase in home sales this December compared to last.

State revenue performance

Tennessee performed better than the Southeastern region and the nation in fiscal year 2012 with total tax collections growing at 8 percent over 2011.

The state also had healthy sales tax collections, growing 6.7 percent, the second highest in the region behind West Virginia. However, third quarter 2012 data showed somewhat slower growth rates. Sales tax collections fell just below the nation and the region, growing at 2.4 percent.

As noted, taxable sales will likely take a severe hit due to the payroll tax.

The report also includes a special focus on e-commerce, which is important since the state relies heavily on the sales tax. Tennessee online business-to-business sales reached $3.5 trillion in 2010, and individual consumers’ online purchases totaled $170 billion that same year. Due to noncompliance in sales and use tax, CBER estimates Tennessee lost approximately $401 million in taxes in 2010 and predicts that these annual losses will continue to grow.

Read the entire report here (pdf).


Matt Murray (865-974-6084 or 865-974-0931,

Whitney Heins (865-974-5460,