UT Report to the Governor: State Economy Improving S-L-O-W-L-Y

KNOXVILLE — It took more than two years to get into this economic mess, and it’s likely going to take more than two years from now to get out of it.

Economic Report to the Governor January 2010Simply put, that’s the forecast in the 2010 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 recession that began in December 2007 has now had more than two years to wreak havoc on the state economy,” wrote Matt Murray, CBER associate director and director of the study. “It will take well over two years for the economy to fully rebound.”

The report notes that the federal stimulus package has helped stabilize the economy: Federal government spending has increased and this will add 1.3 percentage points to growth in the gross domestic product in 2010. The stimulus package has allowed states to stave off aggressive actions, including debilitating budget cuts, raised taxes and depletion of rainy day funds.

The question is how much the economy will falter when stimulus funds run out at the end of the 2010-11 federal fiscal year.

“Concerns are mounting daily on how the states will be able to respond when fiscal stimulus funds are exhausted,” the report says.

Here are some of the major themes in this year’s report:

Employment

“The state unemployment rate will likely average 10.4 percent (in 2010) and remain stuck above 10 percent through 2011,” the report says. “This will translate into more than 300,000 unemployed people in Tennessee in 2010 and 2011 and put sustained pressure on the state’s unemployment insurance trust fund.”

The only sectors expected to see job growth in the coming year are wholesale trade, professional and business services, education and health services, and government.

As for the long-term outlook, the report states that the state unemployment rate is expected to “remain stubbornly high for several years to come, not falling below 7 percent until 2016.”

Tennessee is now into its fourth consecutive quarter with a statewide unemployment rate in excess of 10 percent.

“The number of unemployed people has nearly doubled since the start of the recession,” the report says.

Personal income

“Personal income growth in Tennessee lagged the nation between 1999 and 2009,” the report said. “The long-run forecast indicates that same pattern will emerge in the years out to 2019.”

Nevertheless, some improvement is forecasted.

“A slower rate of job loss, along with the expectation of rising average wage, should produce 2.5 percent growth in wage and salary income in 2010,” the report says. In addition, labor income, proprietors’ income and rent, and interest and dividend income also are expected to grow in the coming year.

As a result, nominal personal income — the sum of wage and salary disbursements, proprietors’ income, personal dividend income, personal interest income, and transfer payments to persons — should grow 2.1 percent in 2010 and 3.5 percent in 2011.

By comparison, nominal personal income rose only 0.2 percent in 2009. Individually, wage and salary income, proprietors’ income and rent, and interest and dividend income all fell.

Sales tax revenue

Taxable sales should show improvement in the coming year, too — partly because the economy will improve and also because sales are at such a severely depressed level now.

“For the year as a whole, taxable sales should advance 2.1 percent in 2010,” the report says.

Before the recession, sales tax revenue peaked in the 2007-08 fiscal year, and revenues aren’t expected to rise beyond that pre-recession peak until the 2012-13 fiscal year.

“In the meantime, the state will find that federal stimulus funds in support of the budget will have been exhausted,” the report says.

Agriculture

Weather conditions are ripe for improvement in the agriculture sector. Now, it’s just a matter of market.

The state’s agriculture sector — which accounts for 11.4 percent of Tennessee’s economy — saw some improvement in the past year.

“Good moisture levels in 2009 resulted in increased soybean, corn, hay and cotton production,” the report said. “Tobacco production and winter wheat production both fell. While 2009 crop prices did not hit the highs seen in 2008, they were sufficient to ensure profitability in the crop sector.”

Livestock producers didn’t fare as well, mostly because higher crop prices meant higher feed costs.

Because of significant rain during the fall, spring planting looks good.

“The big issue for crop farmers in 2010 will be price, as the market is currently on the downward side of a price spike that peaked in 2008,” the report said.

Livestock farmers have reduced the number of animals they keep, but “it remains to be seen if the reduction is large enough to restore profitability to the sector.”

Automobile industry

“Despite some growing pains, Tennessee has successfully moved from a small player in the transportation equipment sector to a major player in the national arena,” the report notes in a special section that examines the future of the U.S. automobile industry and the impact it is likely to have on Tennessee.

The report notes that Tennessee was successful in expanding its role in the transportation equipment sector in the 1980s when it recruited Nissan and Saturn assembly facilities. At its peak in 2000, there were 68,500 jobs in transportation equipment production in Tennessee.

Tennessee has taken a hard hit in this business sector during the economic downturn with Peterbilt and former Saturn production facilities closing.

“But there are bright spots as well for the state’s transportation equipment sector,” the report says, noting that Nissan will be building its zero emissions Leaf car in Rutherford County, and Volkswagen will soon begin production in Hamilton County.

However, the report suggests the state will have to work to maintain that status:

“Tennessee will need to offer a highly skilled workforce and complements to the design, production and assembly processes (like research and development capacity) to maintain and support this important industry cluster.”

Read the full report on CBER’s Web site.

C O N T A C T :

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

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