UT Report: State Economy On A Slow, Steady Path To Recovery

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KNOXVILLE -- The worst is over for the Tennessee economy, but it will be a long road to full recovery as virtually every measure of economic activity -- from real estate to job creation to consumer spending -- now remains at a very depressed level.

This forecast was released today in the spring update to the 2010 Economic Report to the Governor, an annual report prepared by the University of Tennessee, Knoxville's Center for Business and Economic Research (CBER).

While evidence collected by the study illustrates the recession hit rock bottom in the middle of 2009, Tennessee will not see economic activity return to pre-recession levels until 2012 or 2013. Nevertheless, the state is finally on a sustainable path to recovery, according to Matt Murray, CBER associate director and director of the study.

The report notes two areas of concern for the national economy. First, the debt situation in Greece and other European countries poses a risk to our national economy. As uncertainty and speculation persists, financial markets will continue to be volatile and vulnerable.

Second, like Tennessee, state economies have suffered massive budget gaps and have had stimulus funds to cover up to 40 percent of projected shortfalls. This federal assistance will expire in 2011, compelling states to make drastic changes in the form of tax increases and spending cuts in order to balance budgets.

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


Tennessee's employment took a major hit during the recession and it will take several years for it to rebound to 2007 levels.

Nonfarm employment slipped .8 percent in 2008 and then plummeted 5.6 percent the next year. Between the first quarter of 2007 and the first quarter of 2010, the state manufacturing sector shed 88,000 jobs. And in 2009 alone, manufacturing jobs dropped 14.2 percent.

Education and health services and government were the only sectors of the state economy to see job growth in 2007, 2008 and 2009.

"The employment situation across the state has been nothing less than grim," Murray wrote. "It will take a considerable period of time to erase the job losses that mounted over the course of the recession. Even in 2012, employment levels will lag the figures that prevailed in 2007."

Nonfarm employment is expected to fall slightly this year before engineering a strong 1.8 percent rate of growth in 2011. The state manufacturing sector will experience a 2.5 percent setback this year before a 3 percent gain in 2011. The retail trade, professional and business services, education and health services, leisure and hospitality services, and government sectors all will see growth in 2010.

Tennessee's unemployment rate will remain high for several years to come -- 10.2 percent in 2010 and 9.4 percent in 2011. Many of those who lost their jobs during the recession will find it difficult to market their skills when hiring picks up. Additionally, discouraged workers who had a tough time finding employment during the recession will resume their search, thus being counted by the state as officially unemployed again. These two factors will help sustain a high statewide unemployment rate.

Housing market

Tennessee's housing market also illustrates the damage done by the recession and the long path back to recovery.

For example, residential building permits in the Knoxville-metro region were sliced from 6,963 in 2005 to 2,102 to 2009. Making matters worse, the weak employment and earnings environment has caused mortgage delinquencies and foreclosures to surge and that is expected to continue.

"As of this date, neither foreclosures nor delinquency rates have peaked," Murray wrote. "These problems will persist as the unemployed and underemployed find it increasingly difficult to make their monthly payments."

Personal income

Among the morsels of good news in the report, Tennesseans will make more money this year and even more next year.

Nominal personal income -- the sum of wage and salary disbursements, proprietors' income, personal dividend income, personal interest income, and transfer payments to persons -- in Tennessee will increase 2.8 percent in 2010 and 4 percent in 2011.

"Wage and salary income will show healthy gains next year as employment returns to the black. It appears that the bottom is now behind us and an improved outlook is now emerging," Murray wrote.

State tax revenues

Although the growth in state revenues may be turning in the right direction, Tennessee will not reach previous peaks in sales and use tax growth rates for some time to come.

"This recession was the first where Tennessee actually saw tax revenues, which include the influence of inflation, fall over two consecutive fiscal years," Murray wrote. "The Great Recession continues to impact federal and state budgets with spending pressures outweighing revenue collections."

According to CBER, total tax collections in Tennessee increased by $27.2 million, or a 2.2 percent nominal expansion, for the first time in two years, from April 2009 to April 2010, with sales and use tax collections increasing 5.6 percent.

But we still have a long way to go. From April 2007 to April 2010 tax revenues fell 11.2 percent, creating a large gap. At present, revenues remain 8.8 percent below the April 2007 pre-recession level.

"Tennessee tax revenues, as with collections, will not reach their pre-recession collection peak until at least the 2012-13 fiscal year. In the meantime more fiscal pressures will emerge when federal fiscal stimulus funds are exhausted at the end of the 2010-11 federal fiscal year," Murray said.

Taxable sales and sales tax collections will improve as more Tennesseans go back to work and as earnings rise.

Read the full report at http://cber.bus.utk.edu/.
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