UT Report: Weak Housing Market, Higher Prices Continue ‘Bleak’ Downturn in Economy

KNOXVILLE — Economists at the University of Tennessee, Knoxville, describe the current economic picture in the U.S. and Tennessee as “bleak.”

The coming months will bring a continued downturn in the economy and “teeter on the brink of recession,” according to a report released today by the Center for Business and Economic Research (CBER).

The report serves as an update to the annual economic report CBER prepared for Gov. Phil Bredesen in February. It includes analysis and a forecast for the national and state economies and a supplemental report on state tax revenues, which have declined so much that the governor has indicated the need for layoffs.

While some people believe the nation is in the midst of a recession, the UT report does not make the same conclusion mainly because the gross domestic product rose 0.6 percent in the first quarter. A recession is defined as two consecutive quarters of declining GDP.

“Even if we have two quarters of contraction — which I think is unlikely though possible — there is still a chance that the National Bureau of Economic Research will not call this a recession. NBER will look at a broader set of indicators,” said Matt Murray, CBER associate director and project director for the economic report. “This is not to suggest we aren’t in a slump. We are in a slump, and it hurts.”

U.S. Economy

“You might call it piling on, but the bad economic news just won’t go away,” the report states about current conditions.

The aggressive action of the Federal Reserve (Fed) is an indication of how dire the economic situation is. The federal funds rate is 2.0 percent, down dramatically from a peak of 5.25 percent in March 2007.

“The Fed is walking a fine line as it seeks to stimulate economic growth without adding to inflationary pressures,” according to the report.

The March unemployment rate of 5.1 percent is the highest in recent history. Last year in March the rate was 4.4 percent. In the housing sector, mortgage delinquency rates and foreclosures are rising.

High energy prices and the weak housing market will continue to wear down the economy throughout this year and into 2009, according to the report.

The report calls for the housing market to bottom out this year. It says oil prices should level off and drop in 2008 but notes, “We have heard this story before.”

Tennessee Economy

Improvement in the state economy is not expected until 2009.

Job growth was only 0.5 percent in 2007, down from 1.5 percent in 2006. The 2008 first quarter rate was 0.8. The unemployment rate rose to 5.6 percent in March.

The housing market in Tennessee has only been “slightly better” than nationwide. In the first quarter, 4.6 percent of new mortgages were delinquent.

Manufacturing job losses reached 5.4 percent in 2007, compared to 1.1 percent in 2006. The setbacks will continue in 2008 with job losses of 4.2 percent.

Leisure and hospitality services and education and health services are the only sectors expected to have decent growth this year.

State Tax Revenues

Tennessee is not the only state to suffer setbacks in state tax revenue that threaten budget funding. The Southeast was the hardest hit region in the nation with a negative growth of 2.6 percent.

State sales tax revenues are $117.7 million less than expected, and corporate income taxes are down $86.5 million. Sales tax revenue is down because of the housing slump and people buying fewer building materials, home furnishings and vehicles.

The overall budget shortfall could reach $384 million when the fiscal year ends June 30. A similar shortfall is expected for 2009 — bad news for a state that heavily relies on sales tax to fund services.

The report forecasts the federal stimulus package that began this month with rebates to taxpayers will have “muted” impacts.

To view or download the entire Economic Report to the Governor of the State of Tennessee, go to http://cber.bus.utk.edu/.


Contacts:

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

Elizabeth Davis, UT media relations, (865) 974-5179, elizabeth.davis@tennessee.edu