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Outlook for Tennessee Tennessee Gas Association June 14, 2010. David A Penn, Director and Associate Professor Business and Economic Research Center Jones College of Business Middle Tennessee State University [email protected] www.mtsu.edu/BERC. Tennessee Outlook.

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Outlook for TennesseeTennessee Gas AssociationJune 14, 2010

David A Penn, Director and Associate Professor

Business and Economic Research Center

Jones College of Business

Middle Tennessee State University

[email protected]

www.mtsu.edu/BERC


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Tennessee Outlook

  • The worst is behind us (probably!)

  • Number of layoffs is much lower, consistent with job growth.

  • The economy will improve, but not smoothly.

  • Improvement in Tennessee depends on sustained growth of United States economy.

  • Significant risks remain.



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Tennessee Energy Consumption Overview

  • Energy consumption per capita ranks 18th (379 million Btu 2007).

  • Rank of total energy consumption:

    • Petroleum – 16th

    • Coal – 14th

    • Retail electricity – 13th

    • Natural gas – 33rd


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Tennessee natural gas consumption by sector, 2009

Source: Energy Information Administration, DOE



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Major economic indicators

  • Nonfarm employment

  • Initial claims for unemployment insurance

  • Single-family home construction

  • Sales tax collections

  • Unemployment rate


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Nonfarm employment

  • Reliable measure of employment based on a survey of employers.

  • Tennessee lost 212,000 nonfarm jobs 2008.1-2009.4 (-7.8%).

  • Hit bottom December 2009.

  • Now growing, gained 18,000 Dec-April (+0.7%).


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Are we improving?

  • Convincing signs of stability.

  • But the distribution of activity varies greatly.

In recovery

Less pain

Still hurting


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Nonfarm employment

  • April 2010 back to about the same as July 2009.

  • Stabilized at the lowest level since Nov 1997.


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Regional Differences Nonfarm Employment Growth (YTY)

  • In recovery

    • Chattanooga (+0.4%)

    • Clarksville (+0.4%)

    • Knoxville (-0.4%)


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Regional Differences Nonfarm Employment Growth (YTY)

  • Less pain

    • Tennessee (-1.0%)

    • Cleveland (-1.3%)

    • Nashville (-1.4%)

    • Johnson City (-1.7%)

    • Jackson (-1.9%)


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Regional Differences Nonfarm Employment Growth (YTY)

  • Still hurting

    • Morristown (-3.7%)

    • Memphis (-3.0%)

    • Kingsport-Bristol (-2.6%)


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Housing construction

  • Began improving early 2009.

  • Boosted by tax credits late 2009 early 2010.

  • Rate of growth has diminished recently.

  • Headwinds: falling prices, foreclosures, falling incomes, expiration of tax credits.


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Housing construction

  • Gains of early 2009 have diminished.

  • Activity may grind to a halt post-tax credit.

  • Prices falling in Tennessee.


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Repeat sales purchase-only index (FHFA)

  • Sharp decline in the first quarter.

  • Improvement not in sight.

  • Moderately rising prices necessary condition for stability.


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Housing loans first quarter 2010

Source: Mortgage Bankers Association


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Sales tax collections

  • Stabilized at a low level.

  • About even with last April.

  • Expect modest growth this year.



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Unemployment rates (April)

  • Convincing signs of stability.

  • But the distribution of activity varies greatly.

9.6%

10.7%

13.5%

9.7%

9.6%

8.8%

11.2%

11.2%

10.1%

9.4%


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Tracking Tennessee’s Economic Recovery

  • Economic recovery website for the Tennessee Advisory Commission on Intgergovernmental Relations (TACIR).

  • http://www.state.tn.us/tacir/

  • Up-to-date economic indicators for Tennessee and all ten metropolitan areas


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National economic context

  • Manufacturing expanding

    • ISM Index: manufacturing

  • Exports rising, despite troubles in Europe

  • Policy is shifting away from expansion.


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Shape of recovery

  • Check mark

    • Rapid decline followed by slow growth.

    • Most likely scenario.

  • W

    • Double-dip recession.

    • Less probable, but likelihood rising.


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National economic context

  • Manufacturing is expanding

    • ISM Index: in its tenth month of expansion.

    • Some commodity prices are on the rise due to diminished capacity.

    • Rate of increase has slowed.


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Manufacturing

  • U.S. manufacturing employment up 126,000 since December (+1.1%)

  • Manufacturing job growth is rare; Dec-April is the largest five-month increase since 1998.

  • Some manufacturers are discovering foreign plants are not the cost savers they once were (labor strike in China, quality control problems, intellectual property rights, transportation costs).


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Manufacturing

  • Auto manufacturing doing better.

  • Tennessee dependent on auto manufacturing, particularly auto parts.

  • Manufacturing employment in Tennessee has stabilized; not much different from last fall.

  • Nissan expansion, parts maker LKQ announced expansion.



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Tennessee motor vehicle manufacturing

  • 40,000 jobs in transportation equipment manufacturing (2008), including vehicles and aircraft.

  • 32,000 of these jobs are in auto parts manufacturing,

    • Some supply Nissan, formerly GM.

    • Many supply manufacturing plants in other states.




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Expectations for Tennessee

  • Recovery will not occur soon

  • Big hole to climb out

  • Unemployment rate will be very slow to decline



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Possible recovery scenario for nonfarm employment

  • Lost jobs won’t be recovered until Sept 2013, at present rate of growth.

  • Is the current job growth rate (2.1%) sustainable?


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Likelihood of 2.1% job growth

  • Will recovery job growth look more like the 1990s or the 2000s?

  • Months with growth of 2.1% or more:

    • 1990s: 56%

    • 2000s: 5%



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Initial claims for unemployment insurance

  • Good predictor of unemployment.

  • Triggers hiring when level is low.

  • Substantially lower after peaking early in 2009.

  • Even in good times, we experience claims for unemployment insurance.

  • Current level of claims is consistent with employment growth.

  • June will show spikes related to jobs lost due to flooding



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Going Forward

  • Deflation much bigger worry than inflation.

  • Consequences of deflation:

    • Consumers put off purchases, expecting prices to fall further.

    • Borrowers must work harder to make loan payments.

    • Monetary policy becomes powerless.

    • Lending and spending spiral lower and lower as unemployment rises.

    • Japan’s lost decade.


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Where will growth come from?

  • Consumption spending

    • Much recent spending growth from high-income households; middle class still not spending much.

    • Consumer confidence improving.

    • Spending for durables strong in first quarter.

    • If consumers get spooked, double-dip a reality.


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Where will growth come from?

  • Capital spending

    • Headwinds of loan scarcity, overcapacity.

    • Businesses spending more for equipment and software.

    • Less spending for structures.

  • Exports

    • Three quarters of strong growth.

    • Trade with Europe likely will slow due to fiscal problems.


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Where will growth come from?

  • Government spending

    • Net drag on GDP growth last two quarters.

    • Negative contribution due to cuts in state and local government spending.

    • Federal stimulus unwinding next year.

    • State and local cuts will be large this summer; more than 200,000 teachers could be laid off.


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Going Forward 12 Months

  • National economy (WSJ board of forecasters)

    • Job growth 179,000 monthly (1.9% annual growth)

    • Unemployment rate 9% (9.7% now)

    • GDP growth 3% (3% now)

    • Home prices up 2.3% (-3% now)

    • CPI up 1.9% (2.2% now)

    • 10 year Treasury bond 4.2% (3.4% now)


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Going Forward 12 Months

  • Tennessee economy (BERC)

    • Job growth 4,200 monthly (1.9% annualized growth)

    • Unemployment rate 9.6% (10.5% now)

    • Housing construction growth quesionable

    • Home prices zero change


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Going Forward

  • Easing up on stimulus too soon may shove the economy back into recession (1937-1938 experience).

  • In the short-term, must continue expansionary policy, else risk a lost decade for our young people.

  • In the long-term, need a credible deficit reduction plan, including a plan to reduce long-term liabilities.

  • We also need an aggressive job training program for the long-term.


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Going Forward

  • Both these tasks will require sacrifice, compromise, and statesmanship.

  • We are perfectly capable of tackling both simultaneously.


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Summary

  • The patient has stabilized, but condition is guarded.

  • Due to severity of trauma, a long period of recovery will be needed.

  • Should guard against removing support systems too soon.


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Business and Economic Research Center

  • Current and recent research contracts

    • TACIR economic recovery website

    • Estimating medical care costs for southern and eastern Indian tribes

    • Economic impact of the arts in Nashville

    • Quarterly report on Tennessee housing market (THDA)

    • Estimating underemployment for south central Tennessee


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Business and Economic Research Center

  • Current and recent research contracts

    • Economic impact of a prison industry in Bledsoe County, Tennessee

    • Estimating the economic impact of a new port in northwest Tennessee

    • Impact of graduate education in Tennessee

    • Job occupations needed for new green jobs in Tennessee


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