UT Report: Short-term Economic Forecast ‘Downright Ugly’

 

KNOXVILLE — With the economies of the United States and Tennessee in the midst of a “serious” recession, more bad news is ahead for jobs, earnings, investments and unemployment rates.

“The path forward for the national and state economies will be nothing other than downright ugly,” according to the fall 2008 update to the annual Economic Report to the Governor of the State of Tennessee prepared by UT’s Center for Business and Economic Research (CBER) and released today.

Job losses have been recorded each month so far this year. Third-quarter gross domestic product growth will be negative, and it is likely that trend will continue through the second quarter of 2009.

In housing, starts for 2008 will fall below 1 million for the first time since 1945. The state and nation are focused on the housing market because a turnaround in that sector would precipitate a return to growth. However, housing starts are expected to bottom out in the second quarter of next year and slowly rise.

National conditions and forecast

Matt Murray, associate director of CBER who prepared the report, begins a section on current economic conditions bluntly:

“My mother often told me that if I did not have anything good to say, I should say nothing at all. If I followed my mother’s advice, this would be a very brief narrative. Unfortunately all the news is bad news.”

The automobile sector is as dire now as the housing sector in part because fewer people are being allowed to get loans.

The report cites Automotive News’ prediction that more than 700 dealerships will close this year. Layoffs are expected to increase, and the global auto market likely will see huge declines in 2009. Another problem for consumers is at the grocery store, with food prices seeing no relief.

There appears to be some easing in the credit markets since passage of the $700 billion Targeted Asset Relief Program, often referred to as “a bailout.” U.S. banks have lost more than one-third of their capital, and that is likely to reach one-half. The result has been banks cutting back on lending to consumers, businesses and each other.

One positive is that the slowing global economy means inflationary pressures are easing, and energy and commodity prices are sinking. But because of decreased household wealth, consumers do not have the means to increase spending.

“The short-term outlook for the national economy is nothing less than grim,” the report states.

A return to some growth is expected around the second and third quarters of next year. At that time, housing starts should improve. But home values will remain down next year and even into 2012.

The speed of an economic rebound will be slowed by tighter lending standards, and banks will hoard cash. As confidence returns, there will be more loans allowed.

As the economy restructures itself, more bankruptcies and mergers are expected, and job losses will continue with the unemployment rate to average at least 7.2 percent next year.

State conditions and forecast

The near future for the Tennessee economy is uncertain. New data “fail to reveal a bottoming out, let alone a turnaround in growth. There is no upside potential for growth through 2009, only downside risk,” according to the report.

The unemployment rate spiked to 7.2 percent in September, when it was 6.1 percent for the nation. The biggest job losses were seen in transportation and utilities, financial activities, professional and business services, and leisure and hospitality services. The unemployment rate is expected to reach 8.3 percent by the third quarter of 2009, which would be the highest since the recession in 1982.

“The current cycle will displace large numbers of workers who will find it difficult to secure employment in the slow expansion,” the report states.

“Grimmer and grimmer” is the situation for state and local governments’ budgets. All revenue sources have been declining since the middle of 2005. Even property taxes, which have been a reliable source of revenue, could falter with the increasing numbers of mortgage delinquencies and business bankruptcies and lower home values.

To view or download the entire report, go to http://cber.bus.utk.edu/.


Contacts:

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

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

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