Holidays Not Much Help for State Revenue Shortfall

KNOXVILLE — Tennessee won’t get much tax revenue relief for Christmas, but lower U.S. interest rates may arrive in January, a University of Tennessee economist said Tuesday.

Dr. Matt Murray said a 6.7 percent slump in Tennessee’s August index of economic indicators dampens hopes for a holiday surge in sales tax collections, which state officials say could fall $100 million short of projected growth by the end of the year.

Murray also said the Federal Reserve might cut interest rates if high oil prices and rate hikes earlier this year slow the economy too much.

State taxable sales jumped 25.7 percent in August, but that’s less than 2 percent over the same month last year, Murray said.

“The gain in taxable sales does not forecast a particularly strong Christmas buying season in Tennessee,” Murray said.

“We may see a high level of sales activity, but we are not seeing strong growth on a year to year basis. I would be surprised if we get more than 3 percent sales growth (over last year) during the Christmas buying season.

“That does not mean disaster for retailers or for state and local finances. But I don’t think we can look at the holiday buying season to prop up lagging sales tax collections.”

Murray said high oil prices and a sluggish U.S. economy could prompt the Federal Reserve to cut interest rates early next year.

“The full effects of Federal Reserve interest rate increases in May will not filter through the economy until around Christmas,” Murray said. “If fuel prices remain high, the economy may slow more than we want it to.

“I would not be surprised if the Fed takes the initiative at the start of the year by lowering interest rates to try to forestall any sharper deterioration in economic growth.”

The Tennessee August economic index included a slight rise in unemployment claims, but state unemployment remains very low at 3.6 percent, Murray said.

The most negative component was manufacturing jobs, which fell 2,500 to their lowest level since 1991. Most of the losses were in non-durable goods such as textiles, apparel and chemicals.

The Tennessee index is compiled by UT’s Center for Business and Economic Research. It uses recent data to predict economic conditions six to nine months in the future.