UT Report: ‘Tidbits of Good News’ for Economic Improvement

KNOXVILLE – Although economic conditions for the state and nation remain dire, there are early indications that a slow turnaround may be coming.

That’s the cautious optimism expressed in the spring update to the 2009 Economic Report to the Governor, prepared for Gov. Phil Bredesen by the Center for Business and Economic Research (CBER) at the University of Tennessee, Knoxville. The report’s author is Matt Murray, UT economics professor and CBER associate director.

“Pervasive weaknesses are present elsewhere in the economy, and data for the first quarter of the year are nothing less than miserable,” the report says, but adds “at least there are tidbits of good news coming from the economy.”

Among those tidbits of good news: “Consumer sentiment has improved slightly from very depressed levels, mortgage applications are up, the stock market has seen significant gains in recent weeks, and the housing market situation appears to be stabilizing.”

The update reports that a rebound in economic activity should occur in the third and fourth quarters of this year: “Quarterly rates of decline in economic activity will generally decelerate in the next several quarters. Inflation-adjusted gross domestic product will return to the black in the fourth quarter of the year, as will nominal personal income for both the state and the nation. Growth will then be reestablished over the course of 2010. Low interest rates and falling housing prices are expected to revive the housing sector, while fiscal stimulus will help prop up the spending side of the economy, together promoting the economic recovery.”

Because conditions have been so bad, recovery will be lengthy.

“While a turnaround in economic fortunes is expected in the second half of the year, the depth of the recession means that many measures of economic activity will not return to their pre-recession levels until 2012 or 2013,” the report says.

For instance, Tennessee’s unemployment rate is likely to continue to rise well into 2010 and remain at stubbornly high levels for several years.

“Tennessee will see its unemployment rate peak at 10.5 percent by the fourth quarter of 2009, while the nation’s unemployment rate is expected to reach 10.2 percent in the same quarter,” the report says.

The report predicts that the only sectors of the state economy that will not suffer job losses in 2009 are education, health services and government. The second quarter of 2010 is expected to be the first quarter of positive job growth since the fourth quarter of 2007.

In the initial report to the governor in February, Murray predicted that three initiatives could 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 the two-year fiscal stimulus program.

“The Treasury, Federal Reserve, former and current Congress, and former and current President have all taken aggressive steps to lessen the severity of the recession,” the report notes.

Murray acknowledges that the federal stimulus is a temporary influx of money to the states and will drive up the federal deficit. Nevertheless, he says, “the alternative to federal stimulus would have been additional spending cuts and tax increases by the states, actions that would have aggravated the severity of the recession, much in the same way state and local fiscal policy aggravated the depth of the Great Depression.”

Tennessee will receive more than $4 billion in stimulus funds.

“Governor Bredesen has said that while the money will allow time for agencies to adapt to smaller budgets, it will not prevent deep cuts over the next four years,” the report says. “CBER economic and revenue projections indicate tax revenues in Tennessee will rise above their pre-recession levels by the time stimulus funds are exhausted. However, the additional tax revenue will be modest.”

Some other specific notes from CBER’s spring update:

– From March 2008 to March 2009, the nation lost jobs at a 3.5 percent pace. Only four states saw employment gains. Those states were Alaska, North Dakota, Wyoming and Louisiana.

– Every county in Tennessee reported higher unemployment in March 2009 than in March 2008. The largest spike was in Perry County, where unemployment went from 12.4 percent in 2008 to 24.1 percent in 2009.

– While the national unemployment rate for March was 8.5 percent, many American workers are on short-term furlough and reduced hours as their employers try to save money. This “underemployment” combined with the unemployment pushed the rate to 15.8 percent in March.

– Taxable sales in Tennessee will begin to improve in coming months, but through year’s end will show a loss compared to last year. “The only sectors expected to see growth this calendar year are liquor stores and food stores,” the report says.

View the entire economic outlook report online at http://cber.bus.utk.edu.

C O N T A C T :

Leigh Powell (865-974-0937, leigh.powell@utk.edu)