UT Report: No Sign Economy Is Poised for Turnaround

KNOXVILLE – Economic conditions for the state and nation continue to deteriorate with no sign that improvement is coming soon.

That, in a nutshell, is the gloomy forecast presented to Gov. Phil Bredesen in the 2009 Economic Report to the Governor, an annual report prepared by the Center for Business and Economic Research (CBER) at the University of Tennessee, Knoxville.

“The U.S. economy has been in a recession since December 2007 as the housing bubble deflates, access to credit has been extremely limited, and uncertainty and pessimism have made consumers and producers cut back,” the report says. “In December, all 50 states saw their unemployment rates increase, the first time this happened since records have been kept.

“Economic activity is projected to decrease over the course of 2009 as we endure one of the most severe recessions since the Great Depression.”

The report’s author, Matt Murray, who is a UT professor and CBER associate director, says there are three things that will stimulate economic recovery — loosening of monetary policy, induced by the Federal Reserve; the Troubled Asset Relief Program (TARP), which helped prevent total collapse of the complete banking sector and will continue to provide support to that industry; and the two-year fiscal stimulus program that will be approved by the U.S. Congress in the weeks ahead.

The state economy won’t improve until the national economy begins to rebound, the report emphasizes.

“Tennessee’s fate depends on the path taken by the global and national economies in the months ahead. Unfortunately, there is no sign of a bottom to the current cycle,” the report says. “A turnaround is expected in the third quarter as monetary policy, a second fiscal stimulus package and improved housing market conditions lift the economy from bottom. But there are concerns that the economy’s rebound will be delayed until the end of the year or early 2010.”

State economy

Tennessee’s economic conditions spiraled downward throughout 2008:

– The unemployment rate peaked at 7.9 percent in December and averaged 6.4 percent for the year, compared to a rate of only 4.7 percent in 2007.

– Personal income grew only 3.7 percent – just 70 percent of the growth seen the previous year.

– Taxable sales declined 1.6 percent.

The report says many Tennesseans don’t think the residential housing situation here is as bad as it is in other states.

“To some extent this is true,” the report says. “The state certainly did not see the price bubble pop like it has in California, Nevada or Florida. Housing prices here did not skyrocket and then collapse. But recent residential building permit data suggest that the situation is now more dire in Tennessee than it is for the nation as a whole.”

In December 2008, Tennessee’s unemployment rate topped the 7.2 percent national rate. The number of unemployed Tennesseans grew by 51,000 in 2008 and the number of unemployed Tennesseans is expected to continue to rise throughout 2009. The unemployment rates jumped to 10 percent or more in 15 Tennessee counties: Carroll, Overton, Haywood, White, Smith, Fentress, Henderson, Lewis, Lawrence, Monroe, Clay, Pickett, Lauderdale, Scott and Perry.

The report emphasizes that education is key to economic well-being.

“Tennessee counties with well-educated adult populations enjoy lower rates of unemployment, higher rates of job creation and higher levels of per capita income than their more poorly educated counterparts,” it says.

Tennessee’s spending on education remains lower than the nation’s – which means “the state will continue to trail the nation by many measures of economic well-being in the years ahead.”

The report explains: “Many of the jobs that have the greatest demand today didn’t even exist 10 years ago. Moreover, virtually all rapidly growing jobs and occupations require more formal education than the positions of yesterday. Individuals and economies that fail to make sound human capital – i.e. education – investments will find themselves lagging others.”

Economic crapshoot

While the facts are disconcerting, economic predictions are equally worrisome; the chance that things will get worse is just as likely as the chance they will get better, the report says.

“If more financial institutions go under, the financial crisis could become even more severe as the remaining banks try to fortify their balance sheets by holding reserves rather than lending. This would reduce both consumption and investment further than already anticipated which would lead to larger job losses and higher unemployment.

“The probability of a more severe recession than the baseline forecast … stands at 20 percent.”

On the flipside, the report says, “If financial markets react positively to government policy and credit markets unfreeze, then the economy could begin to show early signs of stabilization.

“The probability of a scenario such as this also stands at 20 percent.”

Importance of 2010 Census

As the economy contracts, the state’s demographics are changing, and a section of the report is dedicated to this issue.

“The 2010 census will determine over $3 trillion in federal government outlays over the next 10 years. Because official Census counts will be used by many federal agencies for distributing funds to state and other governments through the state, there are obvious and important financial consequences to ensuring all state residents are correctly tallied in 2010,” the report says.

Tennessee’s population has been growing, but that growth has slowed.

“Compared to the 1990s, in which every county saw at least modest population gains, just over 20 percent of counties will see population declines between 2000 and 2020,” the report says.

Most of the decline will be in the population under the age of 65.

“The changing age structure of the population will present unique opportunities and challenges for Tennessee in the next decade,” the report concludes.

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

Contact:

Amy Blakely, (865) 974-5034, amy.blakely@tennessee.edu

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