The State s Economic Outlook. January

Transcription

1 An Economic Report to the Governor of the State of Tennessee The State s Economic Outlook January 2008

2 An Economic Report to the Governor of the State of Tennessee Matthew N. Murray, Associate Director and Project Director Center for Business and Economic Research Prepared by the Center for Business and Economic Research College of Business Administration The University of Tennessee Knoxville, Tennessee In cooperation with the Appalachian Regional Commission Tennessee Department of Finance and Administration Tennessee Department of Economic and Community Development Tennessee Department of Revenue and Tennessee Department of Labor and Workforce Development Nashville, Tennessee The State s Economic Outlook January2008

3 Acknowledgments Contributors to this Report An Economic Report to the Governor of the State of Tennessee Authors Center for Business and Economic Research Matthew N. Murray, Associate Director and Project Director William F. Fox, Director Donald J. Bruce, Research Associate Professor Vickie C. Cunningham, Research Associate Katherine Harper, Graduate Research Assistant R. Brad Kiser, Research Associate Zachary W. Richards, Graduate Research Assistant Martin Tackie, Graduate Research Assistant Agricultural Policy Analysis Center, Department of Agricultural Economics Harwood D. Schaffer, Research Associate Kelly H. Tiller, Assistant Professor Daryll E. Ray, Blasingame Chair of Excellence Professor Project Support Staff Betty A. Drinnen, Program Resource Specialist Matthew J. Harper, Research Associate LeAnn Luna, Research Assistant Professor Julie L. Marshall, Research Associate Carrie B. McCamey, Communications Coordinator Joan Snoderly, Research Associate Angela R. Thacker, Research Associate The preparation of this report was financed in part by the following agencies: the Tennessee Department of Finance and Administration, the Tennessee Department of Economic and Community Development, the Tennessee Department of Revenue, the Tennessee Department of Labor and Workforce Development, and the Appalachian Regional Commission. This material is the result of tax-supported research and as such is not copyrightable. It may be freely reprinted with the customary crediting of the source. UT Publication Authorization Number E ii Economic Report to the Governor of the State of Tennessee

4 Preface Preface This 2008 volume of An Economic Report to the Governor of the State of Tennessee is the thirty-second in a series of annual reports compiled in response to requests by state government officials for assistance in achieving greater interdepartmental consistency in planning and budgeting efforts sensitive to the overall economic environment. Both shortterm, or business cycle-sensitive forecasts, and longer-term, or trend forecasts, are provided in this report. The quarterly state forecast through the first quarter of 2010 and annual forecast through 2017 represent the collective judgment of the staff of the University of Tennessee s Center for Business and Economic Research in conjunction with the Quarterly and Annual Tennessee Econometric Models. The national forecasts were prepared by Global Insight, Inc. Tennessee forecasts, current as of January 2008, are based on an array of assumptions, particularly at the national level, which are described in Chapter One. Chapter Two details evaluations for major sectors of the Tennessee economy, with an agriculture section provided by the University of Tennessee Agricultural Policy Analysis Center. Chapter Three presents the long-run outlook and forecast for the state. Chapter Four discusses welfare policy changes and the extent to which graduates from Tennessee s institutions of higher education contribute to the state s economy. The primary purpose of this annual volume published, distributed, and financed through the Tennessee Department of Finance and Administration, Tennessee Department of Economic and Community Development, the Tennessee Department of Revenue, the Tennessee Department of Labor and Workforce Development, and the Appalachian Regional Commission is to provide wide public dissemination of the most-current possible economic analysis to planners and decision-makers in the public and private sectors. Matthew N. Murray Associate Director and Project Director Center for Business and Economic Research Economic Report to the Governor of the State of Tennessee iii

5 Contents Contents Chapter 1: The U.S. Economy Introduction The U.S. Economy: Year in Review...3. Components of GDP Inflation and Prices The Labor Market The U.S. Forecast Investment and Interest Rates Consumption and the Labor Market Government Spending Net Exports Prices and Inflation Alternative Scenarios Forecast Summary and Conclusions...16 Chapter 2: The Tennessee Economy:Short-Term Outlook Introduction The Current Economic Environment State Labor Markets Personal Income, Wages and Taxable Sales Tennessee s Housing Market Short-Term Outlook State Labor Markets Personal Income, Wages and Taxable Sales Situation and Outlook for Tennessee Agriculture Overview of Agriculture in Tennessee Year in Review Tennessee Agriculture Agricultural Products in Tennessee Tennessee Agricultural Sector Outlook Farm Income Crops Outlook Livestock Outlook Ag Sector Issues and Opportunities Biofuels Tennessee Agricultural Enhancement Initiative Future Farm Policy Chapter 3: The Tennessee Economy: Long-Term Outlook Introduction Long-Term Historical Trends Employment Trends State Gross Domestic Product and Per Capita Personal Income Population and Labor Force Business Leaders Attitudes Toward Education in Tennessee iv Economic Report to the Governor of the State of Tennessee

6 Contents Contents, continued. 3.3 Long-Term Economic Outlook Labor Market Outlook Income and Output Tennessee s Economic Outlook...55 Chapter 4: Policy Watch Overview a. Welfare Assistance in Tennessee: A Policy Update a.1. Introduction a.2. A Brief History of Welfare Programs in the U.S.. and Tennessee...59 The AFDC Era: The 1996 Welfare Reforms The Waiver Era in Tennessee: The Welfare Reform Reauthorization of What Activities Count as Work? a.3. The New Families First...64 Education as a Work Activity Time Limit Policies Tennessee s New Diversion Program Performance-Based Contracting a.4. Future Welfare Policy Challenges in Tennessee...66 Education Work Activity Participation Rate Requirements Time Limits Diversion Assistance References b. School-to-Work: Do Tennessee s Higher Education. Graduates Work in Tennessee b.1. Introduction b.2. State-Level Labor Market and Earnings Trends...69 Participation by Degree Type Average Wages of Tennessee Graduates in the Tennessee Labor Market b.3. Employment and Earnings Trends by Institution...76 The Basic Question Revisited: Working or Not Full-Time Wages of Tennessee Higher Education Graduates in the Tennessee Labor Market: Comparing Institutions b.4. Employment and Earnings Trends by Field of Study...82 Workforce Participation Trends among Graduates: Comparing Fields of Study Wage Trends among Graduates: Comparing Fields of Study b.5. Conclusions...88 Economic Report to the Governor of the State of Tennessee v

7 Contents Contents, Figures and Tables Chapter 1: The U.S. Economy...1 Figure 1.1. Inflation-Adjusted GDP Growth...3 Figure 1.2. Mortgage Rates and New Home Sales...4 Figure 1.3. Home Prices and Housing Starts...5 Figure 1.4. Inflation-Adjusted Exports and Imports...6 Figure 1.5. Inflation...7 Figure 1.6. Average Gasoline and Oil Prices...8 Figure 1.7. Unemployment Rate...8 Figure 1.8. Employment Growth...9 Figure 1.9. Disposable Personal Income...9 Figure Worker Productivity...10 Figure Foreign Exchange Rate...11 Figure Expected Annual Percentage of Growth in the Primary Components. of GDP...12 Chapter 2: The Tennessee Economy: Short-Term Outlook.. 17 Figure 2.1. Private Employment Growth: June 2006 to June Figure 2.2. Monthly Unemployment Rate (seasonally adjusted),. January 2006 to December Figure 2.3. Monthly Unemployment Insurance Claims,. January 2006 to December Table 2.1: Per Capita Personal Income, 2005 (current dollars)...22 Figure 2.4. Tennessee Sales Tax Collections: Building Materials and. Home Furnishings, January 2006 to October Figure 2.5. Tennessee Realty Transfer and Mortgage Tax Collections...24 Figure 2.6. Single-Family Building Permits, Tennessee Metropolitan. Statistical Areas: March 2001 to November Figure 2.7. Tennessee Job Growth by Sector, 2008 and Table 2.2: Selected U.S. and Tennessee Economic Indicators, Seasonally Adjusted...27 Figure 2.8. Leading Tennessee Commodities for Cash Receipts, Chapter 3: The Tennessee Economy: Long-Term Outlook Figure 3.1: Total Nonfarm Employment Growth, U.S. and Southeastern. States: 1997 to Figure 3.2. Annual Private Employment Growth: 2000 to Figure 3.3. Population Growth: 2000 to Figure 3.4. Percentage Change in Manufacturing Employment: 1997 to Figure 3.5. Percentage Change in Number of Manufacturing. Establishments: 1998 to Figure 3.6: Per Capita Personal Income, U.S. and Southeastern States:. 1990, 2000, and Table 3.1. Population, U.S. and Southeastern States:. 1997, 2007, and Table 3.2. U.S. Civilian Labor Force by Age: 1986, 1996, 2006, and Figure 3.7: Labor Force Participation Rate, U.S. and Tennessee: 1990 to Figure 3.8: U.S. Labor Force Growth by Gender...45 Figure 3.9: U.S. Labor Force Growth by Race and Ethnicity...46 vi Economic Report to the Governor of the State of Tennessee

8 Contents Figure 3.10: Educational Attainment of the U.S. Hispanic Population. Aged 18 Years and Older: Figure 3.11: Educational Attainment of Tennessee s Immigrant. Population by Place of Nativity: Figure 3.12: Perceived Changes in the Quality of the Tennessee. Workforce over the Last 10 Years...51 Figure 3.13: Perceived Changes in the Quality of the Tennessee. Workforce over the Last 10 Years by Firm Location...51 Figure 3.14: Expectations of the Future Tennessee Workforce...52 Figure 3.15: Preparedness of the Tennessee Workforce...52 Table 3.3. Workforce Qualities Valued by Tennessee Businesses for Future Success...53 Figure 3.16: Budget Reallocation Preferences...54 Table 3.4. Grades Given to Tennessee Public k-12 Schools by Category...54 Table 3.5. Projected Growth in Tennessee Occupations: 2004 to Chapter 4: Policy Watch...57 Figure 4a.1. Welfare Programs History...59 Figure 4a.2. Tennessee Welfare Timeline...60 Table 4a.1. How Certain Educational Activities Count in the New Work. Activities Definitions...61 Table 4a.2a. Core Activities...62 Table 4a.2b. Non-Core Activities...63 Figure 4a.3. Families First Contractor Zones...65 Figure 4b.1. Percentage of Higher Education Graduates Working in Tennessee...71 Figure 4b.2. In-State and Out-of-State Student Participationin the Tennessee. Labor Market...72 Figure 4b.3. Distribution of Degrees Awarded...73 Table 4b.1. Average Annual Wages by Select Degrees...73 Figure 4b.4. Workforce Participation by Degree Type...74 Figure 4b.5. Average Annual Wages for All Full-time Workers...74 Figure 4b.6. Average Annual Wages by Select Degrees...75 Figure 4b.7. Trend in Graduates Working in Tennessee...76 Figure 4b.8. Trend in Graduates Working in Tennessee: Associate s Degrees...77 Figure 4b.9. Trend in Graduates Working in Tennessee: Bachelor s Degrees...78 Table 4b.2. Wage CAGRs for Graduates of Tennessee Public Institutions...79 Figure 4b.10. Trend in Wages for Graduates Working in Tennessee...80 Figure 4b.11. Trend in Wages for Graduates Working in Tennessee:. Associate s Degrees...80 Figure 4b.12. Trend in Wages for Graduates Working in Tennessee:. Bachelor s Degrees...81 Figure 4b.13. Trend in Wages for Graduates Working in Tennessee:. Professional Degrees...81 Table 4b.3. Trend in Graduates Working in Tennessee: Bachelor s Degrees...83 Table 4b.4. Trend in Graduates Wages: Bachelor s Degrees...85 Economic Report to the Governor of the State of Tennessee vii

9 Executive Summary Executive Summary The U.S. Economy The U.S. economy continued its slowdown in 2007 as the housing market slumped further and banks tightened credit availability. Inflation-adjusted gross domestic product (GDP), perhaps the most widely used indicator of overall economic health, grew 2.2 percent over the course of the year. Most sectors of the economy, with the exception of residential investment (housing), experienced modest growth. Consumption, which accounts for roughly two-thirds of GDP, grew at a 2.9 percent clip in 2007 while business investment displayed 4.8 percent annual growth. A weakening dollar boosted GDP, contributing to a 7.9 percent growth in exports and only 2 percent growth in imports. The housing market continued to make headlines for its poor performance, declining by an alarming 17 percent in For the year, the job market showed resiliency with unemployment rates averaging 4.6 and an overall increase in employment while inflation was in check at a manageable 2.9 percent. Yearly growth figures mask the recent discouraging developments in the macroeconomy. Despite higher yearly figures, consumption and export growth slowed in the fourth quarter, generating annualized growth of 2 and 3.9 percent, respectively. Residential investment fell more swiftly in the fourth quarter than for the year, registering a 24 percent annual drop. These numbers contributed to overall annual GDP growth of only 0.6 percent for the quarter. To make matters worse, inflation and unemployment rose to 4 percent and 4.8 percent, respectively, in the fourth quarter of These disturbing trends are expected to carry over into 2008, prompting anticipation of further interest rate cuts by the Federal Reserve and the proposal of a substantial federal fiscal stimulus program. Economic growth is projected to fall, but remain positive, in We expect the economy to avoid recession and produce inflation-adjusted GDP growth of 1.9 percent for the year. With the exception of residential investment, all sectors are expected to display positive growth. Consumption spending, government outlays, and business investment will experience modest growth of between 2 3 percent. Export growth will continue to bolster the economy with an expected increase of 9.6 percent for Despite lower interest rates, the housing market will continue to fall: residential investment is estimated to fall by 21.3 percent. Contributing to these projections is the expected weakening of labor markets. Total nonfarm employment should rise in 2008, but only slightly, while unemployment is projected to rise to 5.1 percent. Slow demand growth and a decline in oil prices should keep inflation under control at 2.2 percent for the year. The Tennessee Economy Current Economic Conditions The weight of the national economy has tempered economic growth in Tennessee. Most broad measures of economic activity including job growth, income growth and the unemployment rate weakened as 2007 progressed. The good news is that growth continues to take place. Weaker growth, yes, but growth nonetheless. An important exception is the state s housing sector. Evidence from the state s metropolitan areas points to a significant slowdown in viii Economic Report to the Governor of the State of Tennessee

10 Executive Summary residential construction activity that will affect the economy well into Tennessee s job growth in 2007 was only 0.8 percent, the poorest showing since 2003 when the nation was in the midst of the jobless recovery. Many counties in the state, especially those in rural areas, have struggled mightily to maintain a viable job base; metropolitan Tennessee has fared much better. As job growth has weakened, the unemployment rate has ticked upward. The state unemployment rate bottomed out at 4.0 percent in August. However, by December the unemployment rate had climbed to 5.3 percent. The slowdown has hurt income growth and has dampened taxable sales growth, in turn putting pressures on the state budget and the budgets of local governments across the state. Nominal personal income in Tennessee grew 5.1 percent last year, which is a respectable achievement. But yearover-year taxable sales growth was below 4 percent in the last three quarters of the year, and year-over-year sales tax revenue contracted in January. Short-Term Economic Outlook Tennessee s fate hinges on the path taken by the national economy in the quarters ahead. As we go to print, the economic news for the nation has deteriorated further. This suggests that the short-term forecast for Tennessee presented here is an upper bound on the state s likely growth path through Nonfarm job growth is projected to be 0.6 percent in 2008, improving to 1.0 percent growth in Despite the strong showing in 2007, the state s construction sector is expected to see jobs fall by 0.4 percent for the year. The outlook for construction could weaken further if the economy s weaknesses spill into non-residential construction. The state unemployment rate will average 5.1 percent in 2008, a one-half percentage point increase over Nominal personal income should advance 4.6 percent for the year and inflationadjusted personal income should remain in the black. Wage and salary income will also show positive but slower growth than last year due to slower job growth and slower growth in the average wage. Taxable sales will see growth of only 3.5 percent for the year. Long-Term Historical Trends The ten year historical window for Tennessee includes the slowdown in the late 1990s that culminated in a brief recession in The years immediately following the recession of 2001 were characterized by decent economic growth, though job growth was relatively slow compared to other postrecession expansions. The economy finally gained momentum and produced stronger growth from 2004 and through much of Between 1997 and 2007, Tennessee experienced 8.6 percent job growth compared to 12.4 percent job growth for the nation as a whole. The state s job growth performance placed it in 7 th place compared to other southeastern states. On the other hand, Tennessee s population grew 14.7 percent compared to 12.7 percent for the nation over the same time period. The state s pattern of job and overall economic growth continues to undergo transformation. Manufacturing job and plant losses have continued, as has been the case for the nation. Because rural Tennessee has relied disproportionately on manufacturing, many rural communities have suffered significant job losses. The weak job situation has spilled beyond the labor market: a total of 17 counties saw population contract between 2000 and Metropolitan areas of the state continue to benefit from growth in the service sector. Job growth, per capita income levels and unemployment rates are generally more attractive in metropolitan areas of the state. Long-Term Economic Outlook The long-term trend performance of the state economy is driven by growth in the ingredients to economic growth. Paramount among these is population growth which affects labor force participation rates and the size of the labor market. Population Economic Report to the Governor of the State of Tennessee ix

11 Executive Summary growth rates are expected to slow in the years ahead, while large numbers of the Baby Boom generation will retire. Tennessee will record a 10.1 percent change in population between 1997 and 2020, which is noticeably slower than the 14.7 percent change in population between the shorter historical window (Tennessee is expected to place 5th among the southeastern states in population growth by 2020, trailing Florida, North Carolina, Virginia and Georgia.) Growth in the civilian labor force in 2017 will be about one-half the rate of growth expected in 2010 and An important consequence will be slower rates of growth in state gross domestic product and personal income. Per capita personal income, on the other hand, should continue to grow at a healthy pace. A second important ingredient to economic growth is the skill level of the workforce. Lower-skilled jobs are evaporating rapidly, while jobs requiring more advanced academic training and skill levels are growing at faster rates. If Tennessee cannot produce the skilled workforce required by businesses that compete in the global marketplace, these jobs will go elsewhere, to the detriment of the state and its residents. A survey of business leaders in Tennessee reinforces the seriousness of the current worker skills gap and heightens concerns regarding the outlook in 10 years. To put the situation in perspective, about two-thirds (66.2 percent) of surveyed businesses responded that it will be much harder or harder to find qualified workers in Tennessee s workforce over the next decade. Tennessee Policy Watch Welfare Assistance in Tennessee: A Policy Update Tennessee made a number of significant changes to its Families First welfare program in the past year to both policies for participants as well as the program s administration. Families First must now align with federal rules following the mid-2007 expiration of a waiver that enabled the state Department of Human Services (DHS) to diverge from federal rules. Although Families First had many of the same features of the federal welfare program created in 1996, Tennessee must now adapt to subsequent changes to federal requirements. For example, Tennessee must now conform to federal legislation passed in 2005 that caused virtually all states to face higher work activity participation rate requirements. Previously, Families First emphasized the importance of education and training in moving recipients from welfare to work and included postsecondary education, adult basic education and job skills training as qualifying activities. New federal rules tighten the requirements on including such activities in calculating the work activity participation rate, and training and education now must be more directly related to employment. To meet new federal rules since the expiration of its waiver, Tennessee has made a number of important changes to both its policies and its approach to delivering welfare services to participants. These changes will warrant attention and evaluation from policymakers as they begin to make an impact both on Families First participants and the state s economy. DHS instituted a new performancebased contracting model that divides the state into five zones, each served by a different contractor primarily responsible for matching program participants with work activities. This model provides new variation across the state in how contractors place participants in work, and the outcomes will need to be tracked across contractor zones within Tennessee in order to see if certain methods prove to be x Economic Report to the Governor of the State of Tennessee

12 Executive Summary more effective. Tennessee also eliminated the 18-month interim time limit so that families can now receive assistance for a continuous 60-month period, which may impact not only recipients behaviors, but also future state budgets. The creation of a one-time assistance program intended to divert families from ongoing monthly cash assistance under the traditional Families First program may help Tennessee meet higher participation rate requirements, but will require continued attention from program administrators to ensure that these payment recipients fare as well as traditional Families First participants. School-to-Work: Do Tennessee s Higher Education Graduates Work in Tennessee? Tennessee s institutions of higher education provide an important service to students and the Tennessee economy at large. A better-educated workforce enhances the state s prospects for economic development, and students enhance the quality of life for themselves and their families by earning higher incomes. Graduates from Tennessee s public institutions of higher education make a substantial direct contribution to the state s economy: in 2005, nearly 120,000 Tennessee higher-education graduates within the 1997 to 2005 study period were working in Tennessee and earned over $4.4 billion. Within two years of graduation, about two-thirds of graduates are working in the state. This percentage declines over time, but the leaving workers are replaced by new graduates, effectively re-stocking Tennessee s labor force with educated and trained workers. The labor force participation rates and wages vary considerably by type of degree and field of study, and there are also differences among Tennessee institutions (Tennessee Board of Regents and the University of Tennessee). Wages progressively increase for higher level degrees, and in-state participation rates get progressively lower. Tennessee Board of Regents institution graduates are more likely to remain in the workforce over time, but generally have lower wages and slower wage growth than their University of Tennessee counterparts. The state s institutions of higher education graduate productive workers, a large number of whom remain in Tennessee after graduation. These graduates contribute to the workforce, replace any labor force losses from educated workers leaving Tennessee, and enhance the state s competitiveness. The health of these institutions is vital to the workforce and ultimately to the Tennessee economy. Economic Report to the Governor of the State of Tennessee xi

13 Chapter 1 The U.S. Economy The U.S. Economy In this chapter 1.1. Introduction 1.2. The U.S. Economy: Year in Review Components of GDP Inflation and Prices The Labor Market 1.3. The U.S. Forecast Investment and Interest Rates Consumption and the Labor Market Government Spending Net Exports Prices and Inflation 1.4 Alternative Scenarios 1.5 Forecast Summary and Conclusions 1.1. Introduction The U.S. economy continued its slowdown in 2007 as the housing market slumped further and banks tightened credit availability. While the economy expanded for the sixth straight year following the 2001 recession, pessimism and uneasiness characterized the economic landscape, especially as the year came to a close. Inflation-adjusted gross domestic product (GDP), perhaps the most widely used indicator of overall economic health, grew at an annual rate of 0.6 percent in the fourth quarter of However, GDP growth for 2007 overall is expected to come in at only about 2.2 percent, the lowest level since Unless otherwise noted, all growth rates in this chapter are seasonally adjusted annual rates (SAARs). This chapter provides an overview of the current economic situation for the nation along with a short-term forecast of things to come. 2 To summarize briefly in advance, the U.S. economy appears to be on shaky ground, with some risk of recession in the near future. A relatively decent labor market, low interest rates, and controlled inflation have all contributed to slow, but stable, spending by businesses and consumers. However, economic conditions deteriorated toward the end of The nation s December payroll report showed a loss of jobs, the unemployment rate is on the rise, growth in personal disposable income has weakened and the housing market has 2 CBER bases its U.S. forecast on that provided by Global Insight, Inc. Economic Report to the Governor of the State of Tennessee 1

14 Chapter 1 The U.S. Economy 1.1. Introduction, continued shown no sign of a turnaround. The depth of the problem is illustrated by the Federal Reserve Bank s (Fed) dramatic action in cutting the federal funds rate by threequarters of a percentage point on January 22, following three interest rates cuts last year. The cuts of 2007 were the first in over four years. Psychology and animal spirits will have an important bearing on the direction of the economy in the quarters ahead. The performance of global stock markets is testimony to the role played by psychology. According to the University of Michigan Consumer Sentiment Index, Americans confidence in the state of the economy has faltered: consumer sentiment was almost 18 percent lower in December 2007 than it was a year earlier. Oftentimes, this doubt becomes self-fulfilling in the sense that consumers and businesses will curb current spending today if they anticipate rougher times ahead. This in turn causes economic growth to slow and the economy to weaken exactly what was originally feared. Despite waning confidence, economic growth is expected to continue in 2008, although at a slower rate. Inflationadjusted GDP is expected to rise at a 1.9 percent seasonally adjusted annual rate. However, this estimate is back-loaded in the sense that the economy is expected to grow at only a 0.9 percent annual average rate for the first three quarters of the year, narrowly escaping recession. This growth will be aided by an eventual recovery of the housing sector, continued improvement in trade balances and further interest rate cuts by the Fed, which will spur business and residential investment. While the Fed has already lowered the federal funds rate substantially, expect further cuts as the year unfolds. As this goes to print, federal policymakers are also actively discussing a wide variety of fiscal stimulus packages designed to boost the economy in the short-term, most of which include both tax rebates and spending programs designed to put money in the hands of those that will spend it. The discussion to date has primarily focused on plans that call for around $150 billion in tax relief and increased federal spending, which represents roughly 1 percent of GDP. 2 Economic Report to the Governor of the State of Tennessee

15 Chapter 1 The U.S. Economy 1.2. The U.S. Economy: Year in Review Economists traditionally define a recession as at least two consecutive quarters of inflation-adjusted GDP decline. As shown in Figure 1.1, inflationadjusted GDP growth has been positive since the third quarter of For much of the subsequent five years, growth was around 3 percent, with some fluctuation. Unfortunately, the economy dipped in 2006 and has spent the past couple years with below-average growth, with the exception of the third quarter of The most recent data confirmed news of weak Christmas sales by retailers and low consumer and producer sentiment. Annualized GDP growth in the fourth quarter came in at only 0.6 percent, even lower than was anticipated The Business Cycle Dating Committee at the National Bureau of Economic Research (NBER) is responsible for officially determining the beginning and ending dates of U.S. recessions. The NBER goes well beyond GDP in this process, looking instead at more detailed indicators of macroeconomic activity, some of which are discussed at length in the paragraphs that follow. Components of GDP Inflation-adjusted GDP represents the total value of goods and services sold in the nation in a given period of time. By definition, it is the sum of consumption spending, investment (including plant and equipment, structures, residential housing, and inventories), government spending, and spending on the international market (net exports, or exports less imports). An examination of each component of GDP offers a more complete picture of overall economic health. Consumption spending, which typically makes up about two-thirds of total inflationadjusted GDP, increased at an annual rate of 2.9 percent in This is less than the 2006 and 2005 annual growth rates of 3.1 percent and 3.2 percent respectively. This slowdown has been driven by sluggish growth in consumer purchases of nondurable goods and services. On the other hand, consumer purchases of durable goods remained relatively strong, growing at an annual rate of 4.8 percent in 2007, up from 3.8 percent in Typically, the holiday shopping season provides a yearend boost to consumption. However, that Figure 1.1. Inflation-Adjusted GDP Growth 8.0 Percent change, previous quarter Q1 2001Q3 2002Q1 2002Q3 2003Q1 2003Q3 2004Q1 2004Q3 2005Q1 2005Q3 2006Q1 2006Q3 2007Q1 2007Q3 Source: Bureau of Economic Analysis. Economic Report to the Governor of the State of Tennessee 3

16 Chapter 1 The U.S. Economy 1.2. The U.S. Economy: Year in Review, continued was not the case last year as November and December retail sales growth was the slowest since Spending on residential housing continued its drastic retreat in 2007, providing countless headlines along the way. Residential fixed investment fell by an annualized rate of 24 percent in the fourth quarter of 2007 and 17 percent for the year, significantly worse than the 4.6 percent decline in As shown in Figure 1.2, the average 30-year mortgage interest rate has generally risen since historical lows in mid-2003, peaking in July Since then, mortgage rates have fallen, partially in response to the interest rate cuts by the Fed. As concerns of rising mortgage rates and falling home prices have mounted, sales of single-family homes have plummeted over the past two and a half years. Sales fell by an annual rate of 46.3 percent in the third quarter of 2007, far exceeding the losses of 2006, which generated an 18 percent decline. Business fixed investment rose at an annual rate of 4.8 percent in 2007, down from the 2006 increase of 6.6 percent. This was driven primarily by continued exceptional growth in non-residential investment in structures. The third and fourth quarters of 2007 posted annual growth rates of 16.4 and 15.8 percent, respectively, to go along with solid 8.4 percent growth in Purchases of equipment and software (3.7 percent annual growth in the fourth quarter of 2007) remained modest. Government spending grew by 1.7 percent at the federal level and 2.3 percent at the state and local level in This growth was similar to 2006 (2.2 and 1.6 percent, respectively). Much of the growth in federal spending can be attributed to increased defense spending (2.8 percent annual growth in 2007 compared to 1.9 percent in 2006). Historically, the biggest drain on domestic economic growth has come from the international market. Since spending by domestic consumers on imports is included in consumption, it is subtracted from export spending in order to avoid double counting and to gauge the true level of international activity that contributes to U.S. economic growth. As shown in Figure 1.4, imports have exceeded exports for well over a continued on page 6 Figure 1.2. Mortgage Rates and New Home Sales Mortgage Rate (%) 30-Year Fixed Mortgage Rate (%) New Single-Family Home Sales (thous., SAAR) M1 2003M7 2004M1 2004M7 2005M1 2005M7 2006M1 2006M7 2007M1 2007M7 Thousands of Homes Source: Fannie Mae and the Census Bureau. 4 Economic Report to the Governor of the State of Tennessee

17 Chapter 1 The U.S. Economy 1.2. The U.S. Economy: Year in Review, continued The Housing Market The fall in the housing market and the concurrent sub-prime mortgage turmoil was undoubtedly the most significant economic story of Housing prices began to fall as streets became lined with For Sale signs. Inventories of unsold homes, both new and preexisting, rose to historical levels causing builders to slow down construction of new homes. Figure 1.3 shows the annual growth rate of Fannie Mae s Housing Price Index and the number of new single-family housing starts per quarter. The housing buildup began to gain steam in the early part of the decade as mortgage rates declined from their high in mid-2000 to historical lows in Sustained high rates of home-price appreciation for much of the last 15 years combined with favorable tax treatment made housing an attractive investment for both families and investors. And since houses were appreciating so quickly, banks were quick to finance them. Many of these buyers were considered subprime in that they had blemished credit histories. Many others did not put much (if any) money down or chose nontraditional financing such as interest-only and/or adjustable-rate mortgages (ARMs). Interest rates began to creep upwards and house prices began to flatten in At the same time, many homeowners who took out ARMs with low introductory rates began facing rate resets which drove monthly payments to higher and often unaffordable levels. And since many of these homeowners had not made the traditional 20 percent down payment, refinancing into a lower fixed-rate mortgage was unavailable. As a result, delinquency rates and foreclosures rose. This increasing supply of existing homes combined with continued new construction by homebuilders put downward pressure on houses. These pressures will be sustained well into continued on page 6 Figure 1.3. Home Prices and Housing Starts 20.0 Annual Home Price Grow th (%) Single-Family Housing Starts (SAAR) 2000 Annual growth (%) Thousands of homes Q1 2003Q3 2004Q1 2004Q3 2005Q1 2005Q3 2006Q1 2006Q3 2007Q1 2007Q3 0 Source: Fannie Mae and the Census Bureau. Economic Report to the Governor of the State of Tennessee 5

18 Billions of 2000 Dollars Chapter 1 The U.S. Economy 1.2. The U.S. Economy: Year in Review, continued decade, subtracting from inflation-adjusted GDP. The gap between exports and imports is known as the trade deficit. The trend of increasing trade deficits has begun to reverse. As seen in the figure, the deepening trade deficit has stabilized since 2004, and more recently, begun to improve. In 2007, the trade deficit decreased substantially as annual export growth (7.9 percent) far exceeded import growth (2 percent). Last year (2007) was the second consecutive year of decreasing trade deficits, Figure 1.4. Inflation-Adjusted Exports and Imports Exports (Bil. 2000$) Imports (Bil. 2000$) Trade Deficit (Bil. 2000$) Source: Bureau of Economic Analysis. The Housing Market, continued Now, three years into the housing decline, home price appreciation has grinded to a halt. In fact, home prices decreased at an annual rate of 1.3 percent nationwide in the third quarter of 2007 the first outright decline since the early 1990s. Many regions throughout the country have been experiencing home depreciation for several quarters now. Construction firms have responded to slowing prices and high inventories of unsold homes by slowing development and laying off workers. Single-family housing starts have decreased by 43 percent since the beginning of 2006 and continue to fall more quickly as time goes on. In the fourth quarter of 2007 there were 33 percent fewer housing starts than in the same quarter of Nonresidential investment spending has helped temper the downturn in the construction trades and in building material sales. But nonresidential investment is expected to weaken substantially in The absence of a recovery in the residential sector by the close of 2008 could mean a still deeper trough for the overall construction sector. 6 Economic Report to the Governor of the State of Tennessee

19 Chapter 1 The U.S. Economy 1.2. The U.S. Economy: Year in Review, continued mainly a result of changes in exchange rates (see sidebar on page 11 and Figure 1.11). Inflation and Prices Figure 1.5 shows recent movements in the Consumer Price Index (CPI). The CPI measures the total cost of a typical market basket of consumer goods and services over time, relative to some base period ( ). The CPI rose at an annual rate of 2.9 percent in 2007, down from 3.2 percent in However, in the fourth quarter, prices grew at a 4 percent annual rate, which may be a cause for concern, especially as policymakers pursue stimulative economic policies. Maintaining low levels of inflation has been a primary goal of the Fed, the chief executor of monetary policy in the U.S. When the Fed cuts interest rates, it becomes less expensive for consumers and businesses to borrow money to finance their purchases, driving up demand. This increased demand places upward pressure on prices, which can lead to higher overall inflation. At least some of the recent rise in inflation can be attributed to rising gasoline and crude oil prices. As Figure 1.6 shows, average retail gasoline prices went up 35 percent during 2007, from $2.29 to over $3.00 per gallon. The cost of oil continues to rise due to strong global demand in general and the sharply higher demand coming from developing countries such as Brazil, China, and India. Supply simply cannot grow quickly in the short run to meet the increased demand for oil. Since oil and gasoline are involved in some part of the production process for almost all goods, higher petroleum prices increase the prices of these goods, contributing to inflation. The Labor Market The labor market continued to be relatively favorable in 2007, though markets had softened by the end of the year. Shown in Figure 1.7 is the civilian unemployment rate, which measures the share of the national labor force that is out of work but actively seeking employment. For most of the past year the unemployment rate remained around the 4.5 to 4.7 percent range, as it has since the beginning of As a result, wage inflation has remained relatively subdued. The employment cost index, a popular leading indicator of inflationary pressure in the economy, rose by 3.1 percent in the fourth quarter of This is down from 3.8 percent in the third quarter of 2004 but up from a recent low of 2.8 percent in the first quarter of Annualized employment growth, shown in Figure 1.8, has continued to slow since Figure 1.5. Inflation (Year-Over-Year Percentage Change in CPI) Percent Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Source: Bureau of Labor Statistics. Economic Report to the Governor of the State of Tennessee 7

20 Chapter 1 The U.S. Economy 1.2. The U.S. Economy: Year in Review, continued 2005 contributing to an unemployment rate that has crept slightly higher. Nonfarm employment growth slowed to a less than a 1 percent annual rate during the last three quarters of 2007 for the first time since The year closed on a particularly poor note, as figures for December indicate an annual nonfarm employment growth rate of less than 0.2 percent. For the year as a whole, job growth was up only 1.1 percent. The increase in nonfarm payrolls has occurred despite sharp declines in manufacturing employment dating back to 1998; there were 14 million manufacturing jobs in 2007 compared to 17.6 million in 1998, a 20 percent drop. Manufacturing employment continued to struggle in 2007, posting losses in all four quarters. December was particularly weak, with an annualized loss of 1.7 percent. In total, almost 275,000 manufacturing jobs were lost in 2007 alone in the U.S. The Figure 1.6. Average Gasoline and Oil Prices Dollars Per Gallon Average U.S. Retail Gasoline Price, All Grades West Texas Intermediate Oil Price $3.50 $3.00 $2.50 $2.00 $1.50 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 $100 $90 $80 $70 $60 $50 $40 Dollars Per Barrel Source: Energy Information Administration and the Federal Reserve Bank of St. Louis. Figure 1.7. Unemployment Rate 7.0 Seasonally adjusted rate (%) Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Source: Bureau of Labor Statistics. 8 Economic Report to the Governor of the State of Tennessee

21 Chapter 1 The U.S. Economy 1.2. The U.S. Economy: Year in Review, continued situation would have been much worse absent the decline in the value of the dollar in international currency markets. Despite the jobs losses in manufacturing, industrial production for the national economy continues to grow benefiting from productivity gains. Disposable personal income is shown in Figure 1.9. Prior to 2007, total personal disposable income showed solid growth since the 2001 recession except for slight adjustments in late 2003 and late However, the country experienced another period of downward adjustment in 2007 with drops in the second and fourth quarters. This will hamper consumer spending growth in the quarters ahead. GDP growth over the past several years has exceeded employment growth thanks to strong gains in labor productivity. Unfortunately, as shown in Figure 1.10, this productivity growth has slowed considerably Figure 1.8. Employment Growth 3.0 Total Non-Farm Employment Grow th (% SA) Manufacturing Employment Grow th (% SA) 2.0 SA Percent, Q1 2004Q3 2005Q1 2005Q3 2006Q1 2006Q3 2007Q1 2007Q3 Source: Bureau of Labor Statistics. $8,800 Figure 1.9. Disposable Personal Income $8,400 $8,000 $7,600 $7,200 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Source: Bureau of Economic Analysis. Economic Report to the Governor of the State of Tennessee 9

22 Chapter 1 The U.S. Economy 1.2. The U.S. Economy: Year in Review, continued since 2004, although productivity was 2.7 percent higher in the third quarter of 2007 than the same quarter in However, this is significantly lower than the 3 4 percent gains that the economy typically enjoyed in the early part of the decade. This may reflect a lag between slower growth in output and sales and employment; layoffs are likely to grow through Figure Worker Productivity Output Per Hour, Nonfarm Business Sector (Year-Over-Year %-Change) Q1 2003Q3 2004Q1 2004Q3 2005Q1 2005Q3 2006Q1 2006Q3 2007Q1 2007Q3 Source: Bureau of Labor Statistics. 10 Economic Report to the Governor of the State of Tennessee

23 Chapter 1 The U.S. Economy 1.2. The U.S. Economy: Year in Review, continued The Falling Dollar Figure 1.11 provides a clear picture of one of the most significant economic stories of the past several years and one that promises to continue to play out in the coming years. That is the dramatic fall in value of the U.S. dollar relative to foreign currencies. Shown is the value of the U.S. dollar relative to a weighted average of several major foreign currencies. On one hand, a weak dollar is viewed as a negative from the standpoint of U.S. residents. There is the symbolic effect of a falling currency as well as the real impact as travel to foreign countries becomes more expensive. On the other hand, residents of other nations traveling into the U.S. enjoy relatively cheaper travel to the U.S. A weaker dollar can often generate welcome increases in the flow of international visitors (and their spending money) into the U.S. A weak dollar also raises production costs for domestic firms that purchase inputs from foreign suppliers. At the same time, a falling dollar can be good for overall GDP growth. If U.S. exports become relatively cheaper and U.S. imports from other countries become relatively more expensive, export growth will accelerate and import growth will slow. Both of these trends would reduce the U.S. trade deficit, leading to higher rates of overall inflationadjusted GDP growth. This is perhaps why more U.S. officials have not expressed alarm at the falling dollar. Even if alarm bells went off, there is little policymakers can do when American savings rates are near zero and the federal government continues to run a deficit. Of course, the combination of relatively more expensive imports and increased demand for U.S. exports can result in greater rates of inflation. Indeed, the falling dollar is responsible for a significant share of the expected increase in prices in 2008, compounding the inflationary pressure as the Fed works to promote GDP growth while keeping inflation at reasonable levels. 120 Figure Foreign Exchange Rate Weighted Average Value U.S. Dollar Against Major Currencies 1973=100) Index Value (Mar M1 2002M7 2003M1 2003M7 2004M1 2004M7 2005M1 2005M7 2006M1 2006M7 2007M1 2007M7 Source: Federal Reserve Bank. Economic Report to the Governor of the State of Tennessee 11

24 Chapter 1 The U.S. Economy 1.3. The U.S. Forecast Economic growth will continue in 2008, although at a slower rate than that observed in late Inflationadjusted GDP will grow at a 1.9 percent annual rate for the year, the slowest growth since All broad segments of the economy are expected to show weak but positive growth, as shown in Figure 1.12, with the sole exception of residential investment (housing). As the economy slows, inflation is expected to slow as well. Weaker job growth will contribute to a rising unemployment rate. Investment and Interest Rates As economic growth continues slowly, the federal funds rate is projected to continue its descent from 4.25 percent at the end of 2007 to 3.8 percent in 2008, falling throughout the course of the year. In fact, the Fed has already made sizeable cuts in 2008, lowering the target rate from 4.25 to 3.5 percent on January 22 and to 3.0 percent a week later. Many economists expect further cuts, and it is conceivable that the 2008 average falls below 3.5 percent. These actions should be enough to stimulate investment and consumption spending enough to avoid recession while not adding excessively to inflationary pressures. Residential investment will continue its dramatic decline, and business investment will slow in Housing starts will slow to an annual rate of 1.03 million units in 2008 as inventories of unsold houses rise to historical levels. Starts will be down an estimated 24 percent from their 2007 levels, representing the weakest performance of the decade. Further softening of the housing market will occur despite lower mortgage interest rates; the 30-year fixed mortgage rate is expected to average 6.0 percent and bottom out in mid On net, residential fixed investment is expected to fall by 21.3 percent overall in 2008 compared to a 17.3 percent setback in Lower interest rates and a possible Figure Expected Annual Percentage of Growth in the Primary Components of GDP Exports Federal Govt Spending Business Investment Imports OVERALL GDP Consumption State/Local Govt Spending Residential Investment Percent Source: Global Insight, Inc. Executive Summary, January Economic Report to the Governor of the State of Tennessee

25 Chapter 1 The U.S. Economy 1.3. The U.S. Forecast, continued fiscal stimulus package should help business fixed investment provide solid, but unspectacular, growth for the economy in Growth for the year is projected to come in at 2.7 percent. Much of this slowdown from 2007 s estimated growth of 4.5 percent can be attributed to a substantial fall in nonresidential investment in structures (from an annual rate of 12.6 percent in 2007 to only 0.8 percent in 2008). After a strong rebound in manufacturing structure investment from 2004 to 2006, growth is expected to be down 2.7 percent in Most segments of business investment will experience positive growth this year. Consumption and the Labor Market Personal income is expected to grow at a 4.9 percent annual rate in 2008, below its 6.0 percent pace in the third quarter of 2007 and estimated 6.2 percent growth rate for all of Annual growth in consumption spending over the course of 2008 is expected to reach 1.9 percent, down from 2007 s expected annual growth rate of 2.9 percent. Consumption of services will rise 2.2 percent, spending on nondurable goods will be up 1.8 percent and durable goods spending will see a 1.1 percent gain. The housing market slump will be a prime contributor to slower growth in durable goods. Weak housing prices will dampen the use of home equity loans and the purchase of home furnishings and appliances. Labor market conditions are expected to deteriorate further, but job growth should remain in the black. Job growth outside of manufacturing will barely offset continued declines in manufacturing employment. Overall nonfarm payroll employment will rise by only 0.8 percent nationwide over the course of 2008, while the unemployment rate rises to 5.1 percent. Job growth in 2007 totaled 1.3 percent and the unemployment rate averaged 4.6 percent. Government Spending There has been much talk of a possible fiscal stimulus package being introduced by the federal government to provide the economy with a shot in the arm. President Bush has called for $150 billion of additional federal spending targeted to ailing sectors of the economy. This amount is equal to about 1 percent of total GDP. Any potential stimulus would likely include both spending programs targeted to businesses and households that would be most apt to spend the additional money and tax cuts designed to leave households with more after-tax income to spend. There is ongoing controversy regarding the optimal stimulus package. There have been calls to funnel assistance to low-income groups who would likely spend all of this on consumption, as opposed to overall taxpayers who may save some of the aid and dampen the stimulus. Others have called for a wave of much needed infrastructure investments. Each proposal has its unique set of problems. Consumer relief would likely mean significant spending on imports which would not help the domestic economy, while infrastructure investments might occur too late in the year to boost the economy. And in general, any stimulus package will put upward pressure on inflation. Total spending growth at the federal, state, and local levels is expected to exceed 2007 growth levels. Expect growth in federal government spending of 3.3 percent in Increased spending related to national defense and slower revenue growth from a weakened economy will result in a significantly larger federal budget deficit in In the event that any major bill aimed Economic Report to the Governor of the State of Tennessee 13

26 Chapter 1 The U.S. Economy 1.3. The U.S. Forecast, continued at stimulating the economy is passed, actual growth rates would likely exceed this estimate, and the deficit would grow further. State and local spending will also increase, but only at an annual rate of 1.7 percent. Net Exports The most significant contributor to inflation-adjusted GDP growth in 2008 will continue to be from exports to international markets. Exports will rise at an annual rate of 9.6 percent in 2008, the highest growth in four years. Inflation-adjusted imports will rise at a slower rate of 2.1 percent. These patterns reflect continued strong foreign markets for U.S. products alongside slower demand for foreign products among U.S. buyers, partially a result of an anticipated continued fall in the value of the dollar against the currencies of major trading partners. The end result of these trends is that the trade deficit will continue to be negative and a drag on economic growth, but its impact will be smaller. Prices and Inflation Inflation is expected to measure 2.2 percent in 2008, slowing relative to the estimated 2.9 percent growth in 2007 as pressure weakens due to slower personal income growth and consumer spending, and lower business spending. Also contributing to slower inflation is the projected easing of oil prices. The price of West Texas Intermediate crude should fall from current highs of around $90 per barrel to under $75 per barrel by midyear and continue to hover around that level into Keep in mind that expectations of lower prices tomorrow have been with us for many quarters now, but the moderation in prices has not materialized. 14 Economic Report to the Governor of the State of Tennessee

27 Chapter 1 The U.S. Economy 1.4. Alternative Scenarios There exists widespread pessimism that the recent slowdown in the U.S. economy could turn into recession. While inflation-adjusted GDP is expected to grow slowly, but grow nonetheless, there are several scenarios that could result in even slower growth or push the economy into recession. The primary candidates for slowing the economy further than expected are familiar the continued correction in the housing market and rapid oil price increases. If both of these markets play out more unfavorably than already anticipated, economic growth could be lower than the baseline forecast of 1.9 percent. With mortgage foreclosures primed to hit record highs in 2008, the fall in residential investment may be even more severe than the forecasted decline of 23.1 percent. Other potential concerns include creeping inflation, further tightening in credit markets and weak growth in overseas demand for U.S. goods. Since GDP growth in 2008 is highly dependent on strong export growth buoyed by a U.S. dollar that is predicted to lose value against other major currencies for the seventh consecutive year, any event that disrupts overseas demand could jeopardize the outlook. Economic Report to the Governor of the State of Tennessee 15

28 Chapter 1 The U.S. Economy 1.5. Forecast Summary and Conclusions Expect the ongoing economic slowdown to continue in 2008 as the housing market remains a significant drag on the economy. Inflation-adjusted GDP will increase at an annual rate of 1.9 percent. Residential housing investment will continue its drastic decline (21.3 percent) despite lower mortgage interest rates. Government spending will grow at the federal (3.3 percent) and state and local (1.7 percent) levels. Strong export growth (9.6 percent) will exceed import growth, improving the trade deficit. The inflation rate, as measured by the Consumer Price Index, will fall to 2.2 percent. The unemployment rate will rise to 5.1 percent. Interest rates are likely to fall further as the Fed attempts to boost sluggish GDP growth. 16 Economic Report to the Governor of the State of Tennessee

29 Chapter 2 The Tennessee Economy: Short-Term Outlook The Tennessee Economy: Short-Term Outlook In this chapter 2.1. Introduction 2.2. The Current Economic Environment Personal Income, Wages and Taxable Sales 2.3. Short-Term Outlook State Labor Markets Personal Income, Wages and Taxable Sales 2.4 Situation and Outlook for Tennessee Agriculture Overview of Agrculture in Tennessee Tennessee Agricultural Sector Outlook Ag Sector Issues and Opportunities 2.1. Introduction The Tennessee economy weakened as 2007 unfolded, following the path of the national economy. While economic growth has decelerated, there are few signs of outright contraction aside from the residential housing sector. In general, the dire concerns regarding the future of the national economy are not consistent with current data on the performance of the state economy. At the same time, recent data releases have shown further weakening of the economy. Nonfarm job growth was up only 0.8 percent for the year, versus 1.5 percent growth in 2006, while personal income advanced 5.1 percent, compared to 5.7 percent growth in the previous year. The state unemployment rate averaged only 4.6 percent in 2007, down from the 5.2 percent rate in But the unemployment rate has jumped sharply since it hit a 4.0 percent low in August of 2007, reaching 5.3 percent in December. Growth is expected to decelerate further as 2008 unfolds and most measures of economic prosperity will weaken relative to both 2006 and A contraction in not expected, though this will be determined by the course taken by the national economy. Stronger growth is expected to reemerge when the national housing market begins its turnaround in the final quarter of the year. A delayed housing rebound would delay a return to stronger growth in Tennessee. Economic Report to the Governor of the State of Tennessee 17

30 Chapter 2 The Tennessee Economy: Short-Term Outlook 2.2. The Current Economic Environment State Labor Markets The Tennessee labor market showed signs of softening in Nonfarm job growth drifted down from a 0.9 percent year-overyear growth rate in the first quarter of the year to 0.8 percent year-over-year growth in the fourth quarter. Annualized job growth of 0.8 percent in 2007 was the weakest showing since 2003 when the state saw jobs fall at a 0.1 percent rate. The U.S. saw year-over-year nonfarm job growth fall from 1.5 percent in the first quarter to 0.9 percent in the final quarter of the year. For 2007 as a whole the nation experienced 1.3 percent job growth. The employment situation varies significantly across Tennessee counties as shown in Figure 2.1. Forty-five Tennessee counties endured nonfarm job losses or no employment growth between June 2006 and June Perry County suffered the largest setback with jobs falling by nearly 17 percent, while Chester County came in second with a 10.6 percent decline in nonfarm employment. On the other hand, Lauderdale County each enjoyed a doubledigit job gain of 12.4 percent. Stronger job growth continues to be centered in and around the state s metropolitan areas. These metropolitan areas typically have a larger and better trained workforce, more amenities and a stronger infrastructure that can support economic development. The woes in manufacturing have deepened despite the fall in the dollar that has helped boost manufactured exports. The number of manufacturing plants is in decline, the number of workers per plant is falling and annual employment losses have accelerated. Manufacturing jobs in Tennessee fell 0.7 percent in 2005, but the rate of decay increased to 2.1 percent in 2006 and to 2.5 percent in The national economy also experienced a sharp drop in manufacturing employment in 2007 relative to Year-over-year job losses in Tennessee s manufacturing sector did slow slightly over the course of 2007, likely benefiting from the improved exchange rate position of the national economy. Despite these job losses in manufacturing, industrial output continues to surge ahead benefiting from strong gains in productivity. State gross domestic product in manufacturing is expected to have seen 5.1 percent growth in The jobs that remain in manufacturing today are very different from the jobs that prevailed decades ago. Manufacturing plants are different as well, relying on Figure 2.1. Private Employment Growth: June 2006 to June 2007 Tennessee: 0.5 percent 0.00% or less 0.01% to 2.49% 2.50% to 4.99% 5.00% or more Source: Bureau of Labor Statistics. 18 Economic Report to the Governor of the State of Tennessee

31 Chapter 2 The Tennessee Economy: Short-Term Outlook 2.2. The Current Economic Environment, continued modern production techniques and high technology equipment and computer systems. Manufacturing workers must be well trained and possess good skills to enable them to compete with their counterparts across the globe in this modern manufacturing era. Manufacturing employment represented 13.9 percent of all nonfarm jobs in Tennessee in 2007 compared to 10.1 percent for the nation. For the state, this represents a 5.6 percentage point decline in the relative contribution of manufacturing to the state s job base since There were 390,200 manufacturing jobs in Tennessee in 2007, reflecting the loss of nearly 113,000 jobs over the course of just ten years. These losses have created hardship for both workers and their communities. The job losses in manufacturing have been broadly based and few subsectors of the economy have been spared. Within the nondurable goods sector, all major subsectors other than plastics and rubber have seen setbacks. It is telling that the old textile and apparel subsectors have now been reclassified into one sector: textile mills, textile mill products and apparel. This combined grouping experienced employment losses totaling 10.4 percent in Job losses in durable goods in 2007 came in at 2.3 percent, a bit better than the 2.9 percent loss in nondurable goods. Only three durables subsectors nonmetallic minerals, fabricated metals and electrical equipment were able to engineer job gains last year. The computers and electronics subsector saw jobs whither by 11.6 percent in That s the bad news. The good news is that inflation-adjusted output in this same subsector was up sharply with a 20.4 percent jump for the year due to amazing gains in productivity. An interesting anomaly, given the weakness in the nation s housing sector, is the continued strong growth in construction sector employment (see below). Construction jobs were up 6.0 percent in 2007 on the heels of 8.0 percent growth in the previous year. Year-overyear growth exceeded 6 percent in the first three quarters of the year, though quarterly seasonally-adjusted growth rates did slow over these quarters. Seasonally-adjusted quarterly growth slowed to only 1.0 percent by the fourth quarter, though year-overyear growth in the fourth quarter stood at 5.3 percent. Wholesale trade, information, education and health services, and leisure and hospitality services all enjoyed growth rates well above the economy-wide average. Outside of manufacturing, only professional and business services and federal government employment contracted. The state unemployment rate bottomed out at 4.0 percent in August, a rather incredible achievement given the overall weakening of the economy. But rates have drifted up since August, reaching 5.3 percent in December, raising the specter of still higher rates in 2008 (see Figure 2.2). Initial claims for unemployment insurance for both the state and nation have been on the ascent in recent months as shown in Figure 2.3. On an annual basis, the state s unemployment rate averaged 4.6 percent in 2007, matching the unemployment rate for the nation. The labor force in Tennessee grew 1.7 percent in 2007, down from 2.4 percent growth in the previous year. This growth was due to strong growth in the number of employed people (up 2.3 percent) that offset a 9.4 percent reduction in the number of unemployed people. Year-over-year reductions in the number of unemployed people have been in double digits dating back to the fourth quarter of This pattern is not likely to be sustained in the quarters ahead given the expected deterioration in overall economic conditions. Economic Report to the Governor of the State of Tennessee 19

32 Chapter 2 The Tennessee Economy: Short-Term Outlook 2.2. The Current Economic Environment, continued Personal Income, Wages and Taxable Sales Nominal personal income in Tennessee grew 5.1 percent in 2007, following three consecutive years of 5.7 percent growth. The state s showing in 2007 lagged the nation s rate of growth (6.2 percent) by more than a percentage point. Wage and salary income which accounted for almost 55 percent of total personal income in 2007 was up 4.9 percent compared to 6.0 percent in A one-half percentage point reduction in job growth in 2007 relative to 2006 contributed to the slower growth in wage and salary income. The average nominal wage across all sectors of the state economy grew 4.1 percent in 2007, down slightly from 4.5 percent growth in The prevailing average wage stood at $39,831 in The lowest average wage was in the tourism-related leisure and hospitality services sector ($18,938), while the highest was in the federal government ($62,950). Manufacturing workers earn a premium of 16.4 percent relative to the statewide average wage. Proprietors income was up only 1.9 percent in 2007 and provided the weakest contribution to overall personal income growth. Rent, interest and dividend income grew 6.5 percent for the year, down from 10.1 percent growth in Transfer payments were up 7.6 percent, well ahead of the 4.2 percent pace of growth in the previous year. Tennessee per capita personal income totaled $33,746 in 2007, which was 87.4 percent of the national average. Table 2.1 includes per capita personal income figures for Tennessee counties in 2005 (the most recent year for which county data are currently available). Generally per capita incomes are higher in and near metropolitan areas where the labor force is characterized by a higher degree of educational attainment; per capita income averaged $33,341 in metropolitan counties as opposed to only $24,646 in nonmetroplitan counties. Williamson County had the highest per capita income of any county in the state Figure 2.2. Monthly Unemployment Rate (seasonally adjusted), January 2006 to December TN U.S Jan 06-Feb 06-Mar 06-Apr 06-May 06-Jun 06-Jul 06-Aug 06-Sep 06-Oct 06-Nov 06-Dec 07-Jan 07-Feb 07-Mar 07-Apr 07-May 07-Jun 07-Jul 07-Aug 07-Sep 07-Oct 07-Nov 07-Dec unemployment rate (%) Source: Bureau of Labor Statistics; and Tennessee Department of Labor and Workforce Development. 20 Economic Report to the Governor of the State of Tennessee

33 Chapter 2 The Tennessee Economy: Short-Term Outlook in 2005 at $47,712. Only two counties (Davidson and Williamson) exceeded the national average in The lowest per capita income was in Hancock County ($15,526). Taxable sales growth has slowed appreciably on a year-over-year basis, with the last three quarters of 2007 showing gains of less than 4.0 percent. Growth for 2007 was 4.1 percent due to a reasonably strong showing in the first quarter of the year. The many burdens currently placed on consumers including the housing slump have contributed to the slowdown. Automobile dealer sales plummeted 11.2 and 10.6 percent in the second and third quarters of the year (seasonally adjusted annual rates). A gain in the fourth quarter was not enough to move year-over-year sales into the black. Tennessee s Housing Market As the nation s housing market has slumped, so too has the Tennessee housing market. Building and home furnishing sales have weakened, realty mortgage and transfer tax collections have slowed and building permit data for the state s major metropolitan areas are in sharp decline. At the same timer, the state s construction sector as measured by employment continues to show exceptionally strong gains. The third quarter of 2007 showed job gains of 6.1 percent in construction, consistent with the second quarter and down only slightly from the 6.7 percent pace of job growth in the first quarter of the year. Data for December reveal 7.0 percent growth on a year-over-year basis. Some of the strength in construction can be explained by ongoing building of homes that have been under contract for some period of time. This cannot, however, explain the continued growth in hiring. The only explanation is non-residential building. Nationally, nonresidential construction is expected to slow through the year suggesting that further gains of this magnitude are highly unlikely. continued on page 23 Figure 2.3. Monthly Unemployment Insurance Claims, January 2006 to December ,000 TN U.S. 2,500.0 TN initial claims 50,000 40,000 30,000 20,000 10,000 2, , , U.S. initial claims (thous) 0 06-Jan 06-Feb 06-Mar 06-Apr 06-May 06-Jun 06-Jul 06-Aug 06-Sep 06-Oct 06-Nov 06-Dec 07-Jan 07-Feb 07-Mar 07-Apr 07-May 07-Jun 07-Jul 07-Aug 07-Sep 07-Oct 07-Nov 07-Dec 0.0 Source: U.S. Department of Labor and Tennessee Department of Labor and Workforce Development. Economic Report to the Governor of the State of Tennessee 21

34 Chapter 2 The Tennessee Economy: Short-Term Outlook 2.2. The Current Economic Environment, continued Table 2.1: Per Capita Personal Income, 2005 (current dollars) Area Amount Rank Area Amount Rank TENNESSEE 30,969 x Lauderdale 19, Anderson 29, Lawrence 22, Bedford 26, Lewis 20, Benton 21, Lincoln 26, Bledsoe 21, Loudon 30,538 9 Blount 27, McMinn 24, Bradley 28, McNairy 25, Campbell 23, Macon 23, Cannon 26, Madison 29, Carroll 24, Marion 25, Carter 22, Marshall 24, Cheatham 29, Maury 27, Chester 22, Meigs 22, Claiborne 23, Monroe 22, Clay 20, Montgomery 31,812 7 Cocke 19, Moore 26, Coffee 28, Morgan 19, Crockett 24, Obion 27, Cumberland 24, Overton 21, Davidson 42,192 2 Perry 24, Decatur 25, Pickett 20, DeKalb 25, Polk 24, Dickson 26, Putnam 26, Dyer 27, Rhea 22, Fayette 29, Roane 27, Fentress 22, Robertson 29, Franklin 24, Rutherford 29, Gibson 25, Scott 19, Giles 25, Sequatchie 23, Grainger 21, Sevier 28, Greene 30, Shelby 36,160 3 Grundy 21, Smith 25, Hamblen 26, Stewart 23, Hamilton 34,799 4 Sullivan 29, Hancock 15, Sumner 31,033 8 Hardeman 20, Tipton 25, Hardin 25, Trousdale 23, Hawkins 23, Unicoi 26, Haywood 23, Union 19, Henderson 24, Van Buren 24, Henry 25, Warren 25, Hickman 20, Washington 28, Houston 23, Wayne 17, Humphreys 25, Weakley 24, Jackson 23, White 21, Jefferson 23, Williamson 47,712 1 Johnson 18, Wilson 34,030 5 Knox 32,815 6 Metropolitan Portion 33,341 x Lake 16, Nonmetropolitan Portion 24,646 x Source: Bureau of Economic Analysis. 22 Economic Report to the Governor of the State of Tennessee

35 Chapter 2 The Tennessee Economy: Short-Term Outlook 2.2. The Current Economic Environment, continued Indirect evidence on the state s housing market slowdown is illustrated in Figure 2.4 which shows year-over-year sales tax collections for two components of the sales tax base, building materials and home furnishings. Building material sales have been in decline for many quarters and are now contracting on a year-over-year basis; home furnishing sales paint a slightly more encouraging picture, though they are down relative to last year. Figure 2.5 shows annual percentage changes in realty transfer and mortgage tax collections dating back to the beginning of the decade. Year-to-date growth in realty transfer and mortgage tax collections is only about 25 percent of the rate of growth in fiscal year 2006/07. Thirty-four counties have seen this revenue category contract relative to last year. Residential building permit data for the state s major metropolitan areas generally reveal contraction as shown in Figure 2.6. The Tri-Cities has the best performance, at least in recent months. Permitting in Memphis is down by over 50 percent; Clarksville-Hopkinsville has seen some improvement but starts are still down by nearly 50 percent. These figures do not bode well for the quarters ahead since building permits are an important leading indicator of construction activity. Figure 2.4. Tennessee Sales Tax Collections: Building Materials and Home Furnishings, January 2006 to October 2007 percentage change, same month last year Building Materials Home Furnishings Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Note: Percentage change calculated on three-month moving average. Source: Tennessee Department of Revenue, Revenue Collections, monthly. Economic Report to the Governor of the State of Tennessee 23

36 Chapter 2 The Tennessee Economy: Short-Term Outlook 2.2. The Current Economic Environment, continued Figure 2.5. Tennessee Realty Transfer and Mortgage Tax Collections percentage change FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 Source: Tennessee Department of Revenue. 24 Economic Report to the Governor of the State of Tennessee

37 Chapter 2 The Tennessee Economy: Short-Term Outlook 2.2. The Current Economic Environment, continued Figure 2.6. Single-Family Building Permits, Tennessee Metropolitan Statistical Areas: March 2001 to November 2007 (year-over-year percentage change of three-month moving average) 160 Chattanooga, TN-GA MSA 160 Clarksville-Hopkinsville, TN-KY MSA Jackson, TN MSA 160 Knoxville, TN MSA Memphis, TN-AR-MS MSA 160 Nashville, TN MSA Johnson City-Kingsport-Bristol, TN-VA MSA Source: U.S. Census Bureau. Economic Report to the Governor of the State of Tennessee 25

38 Chapter 2 The Tennessee Economy: Short-Term Outlook 2.3. Short-term Outlook Tennessee s fate in 2008 will be dictated by the path taken by the national economy. High energy prices and the contagion created by the housing slump will weigh down heavily on consumer spending, while slower growth in business fixed investment will place additional pressure on construction and related sectors. Exports will continue to benefit from a sliding dollar, but this will not be enough to overcome downward pressures elsewhere in the economy. The outlook presented below hinges largely on a turnaround in residential housing. While the housing market is expected to bottom out and begin rebounding before the close of 2008, there has been no relief to date. This raises concerns about the possible path of economic growth well into A recession is not built into the short-term outlook, but weaker economic conditions nonetheless will prevail in 2008 compared to Consistent with recent history, the national economy will do better than the state economy in both 2008 and A summary of the outlook is provided in Table 2.2. State Labor Markets Tennessee nonfarm job growth will come in at 0.6 percent in 2008, down from 0.8 percent growth in 2007 (see Figure 2.7). The U.S. will see stronger job growth of 0.8 percent for the year. Job growth should gain momentum in 2009, yielding 1.0 percent growth for the state and 1.2 percent growth for the nation. Construction sector employment is expected to weaken as the inventory of unfinished homes comes to completion and as business investment slows. Construction jobs are expected to fall by 0.4 percent in The trade, transportation and utilities sector which accounted for 21.9 percent of all state jobs in 2007 will see 1.1 percent growth for the year. Professional and business services will see weak but positive growth of 0.4 percent in 2008, education and health services employment will rise by 2.0 percent and leisure and hospitality services will be up 2.3 percent. There is no relief in sight for the state and national manufacturing sectors. While there will continue to be some new Figure 2.7. Tennessee Job Growth by Sector, 2008 and Percentage Change Total Nonfarm Natural Resources and Mining Construction Manufacturing Trade, Trans. and Utilities Information Financial Activities Professional and Business Activities Education and Health Services Leisure and Hospitality Other Services Government Source: CBER-UT. 26 Economic Report to the Governor of the State of Tennessee

39 Chapter 2 The Tennessee Economy: Short-Term Outlook 2.3. Short-term Outlook, continued Table 2.2: Selected U.S. and Tennessee Economic Indicators, Seasonally Adjusted History Forecast Data Annual January :2 2007:3 2007:4 2008:1 2008:2 2008:3 2008:4 2009:1 2009:2 2009:3 2009:4 2010: US GDP (Bil2000$) SAAR % Chg Prev Qtr SAAR % Chg Same Qtr Last Yr US GDP (Bil$) SAAR % Chg Prev Qtr SAAR % Chg Same Qtr Last Yr CHAINED PRICE INDEX, GDP (2000=100.0) % Chg Prev Qtr SAAR % Chg Same Qtr Last Yr US PERS CONSUMP DEFL (2000=100.0) % Chg Prev Qtr SAAR % Chg Same Qtr Last Yr TN PERSONAL INCOME (MIL2000$) SAAR % Chg Prev Qtr SAAR % Chg Same Qtr Last Yr US PERSONAL INCOME (BIL2000$) SAAR % Chg Prev Qtr SAAR % Chg Same Qtr Last Yr TN PERSONAL INCOME (MIL$) SAAR % Chg Prev Qtr SAAR % Chg Same Qtr Last Yr US PERSONAL INCOME (BIL$) SAAR % Chg Prev Qtr SAAR % Chg Same Qtr Last Yr TN NONFARM JOBS (THOUS) % Chg Prev Qtr SAAR % Chg Same Qtr Last Yr US NONFARM JOBS (MIL) % Chg Prev Qtr SAAR % Chg Same Qtr Last Yr TN UNEMPLOYMENT RATE (%) US UNEMPLOYMENT RATE (%) BANK PRIME INTEREST RATE (%) CONSUMER PRICE INDEX, ALL-URBAN (82-84=1.000) FEDERAL FUNDS RATE (% per annum) YEAR FIXED MORTGAGE RATE (%) TN MFG JOBS (THOUS) % Chg Prev Qtr SAAR % Chg Same Qtr Last Yr US MFG JOBS (MIL) % Chg Prev Qtr SAAR % Chg Same Qtr Last Yr TN TAXABLE SALES (MIL2000$) % Chg Prev Qtr SAAR % Chg Same Qtr Last Yr TN TAXABLE SALES (MIL$) % Chg Prev Qtr SAAR % Chg Same Qtr Last Yr TN AVG ANNUAL WAGE, NONFARM (2000$) % Chg Prev Qtr SAAR % Chg Same Qtr Last Yr TN AVG ANNUAL WAGE, NONFARM ($) % Chg Prev Qtr SAAR % Chg Same Qtr Last Yr Center for Business and Economic Research, University of Tennessee Tennessee Econometric Model Economic Report to the Governor of the State of Tennessee 27

40 Chapter 2 The Tennessee Economy: Short-Term Outlook 2.3. Short-term Outlook, continued plant openings, existing plant expansions and new jobs created in manufacturing, these gains will be offset by contraction elsewhere in manufacturing. Industrial output, on the other hand, will continue to grow. Tennessee should see manufacturing jobs fall 2.4 percent in 2008 while the national economy sheds 1.9 percent of its manufacturing job base. The state s durable goods sector will be down 2.1 percent and the nondurable goods sector will be down 2.8 percent. Job losses in transportation equipment will ease some from 2007, with a setback of 2.9 percent compared to a 3.9 percent loss last year. Transportation equipment will see renewed strength in 2009 and post job gains, assuming the nation moves to a stronger growth trajectory. Nonmetallic minerals, fabricated metals and miscellaneous nondurable goods are the only subsectors of manufacturing expected to see growth in The state unemployment rate will rise to 5.2 percent in the third quarter of the year as the economy softens further. The state and the nation should see a 5.1 percent annual average unemployment rate for the year. Slight improvement in the unemployment situation should be seen by the middle of Slower job growth will mean slower growth in the number of employed people in Tennessee, while the number of unemployed people is expected to rise sharply. Labor force growth for the state is projected to be 1.4 percent for the year. up 4.9 percent in 2007/08 and 4.7 percent in 2008/09. Wage and salary growth will total 3.8 percent for the state, down from 4.9 percent growth last year. Slower job growth and slower growth in the average wage will each contribute to slower aggregate earnings growth. Proprietors income will be up 3.9 percent; rent, interest and dividend income will advance 6.1 percent; and transfer payments will grow 6.5 percent. Tennessee s per capita personal income should show 3.7 percent growth in 2008, down from 4.2 percent growth last year. This will be the slowest growth in per capita income since 2003 when income was up only 3.0 percent. Some improvement in per capita income growth will be seen in Greater slack in the state s labor markets will put less upward pressure on average earnings into Following 4.1 percent growth in 2007, expect the nominal average wage to grow 3.1 percent in both 2008 and Most sectors of the economy will see slower earnings growth in 2008 compared to the previous year. Taxable sales are expected to weaken marginally in 2008 and show growth of only 3.5 percent. This will be the poorest showing since 2002 when sales were up only 1.3 percent. Above average growth will take place in eating and drinking places, liquor stores, hotels and motels, other retail and services, and transportation, communications and utilities. Personal Income, Wages and Taxable Sales Nominal personal income in Tennessee should advance 4.6 percent in 2008, just below the 4.9 percent gain expected for the national economy. Slightly slower income growth, along with consumer spending retrenchment, will dampen the state s revenue outlook for the remainder of 2007/08 and for 2008/09. On a fiscal year basis, expect nominal personal income to be 28 Economic Report to the Governor of the State of Tennessee

41 Chapter 2 The Tennessee Economy: Short-Term Outlook 2.4. Situation and Outlook for Tennessee Agriculture Overview of Agriculture in Tennessee Year in Review Tennessee agriculture experienced anything but a typical year in The year will be remembered for high crop prices, an April freeze, a record-breaking drought, and the bursting forth of biofuels onto the agricultural scene. The swift increase in corn prices began on September 15, 2006 in response to the anticipation of an unprecedented demand for corn to make ethanol as a large number of corn-to-ethanol plants were scheduled to begin coming online in mid The price increases for soybeans, wheat and other crops lagged well behind corn. In response to very profitable corn prices, Tennessee farmers planted 870 thousand acres of corn, an increase of 320 thousand acres or 63 percent. Cotton acreage in Tennessee fell by 200 thousand acres to 500 thousand acres, while soybean acreage fell from 1.16 million acres to 1.04 million acres, a loss of 120 thousand acres. In making this shift to more corn acres, Tennessee farmers were following the same pattern of farmers across the country. March saw unseasonably pleasant weather as winter wheat began to grow, fruit trees began to blossom and most trees began to leaf out. Then a hard freeze hit during the first week in April and lasted for several days. Winter wheat yields fell from a record 64 bu/ac in 2006 to a dismal 41 bu/ ac in The commercial peach crop in Tennessee was a total loss. The previous year they sold $2.5 million worth of product. The commercial apple crop was a near total loss. In 2006, Tennessee orchardists harvested 10 million pounds of apples with a value of $2.2 million. In 2007 they harvested 1 percent of that amount. As a result of the drought, corn yields fell from 2006 s 125 bu/ac to 108 bu/ac. It was only because of the increased corn acreage that Tennessee corn production rose by 25 million bushels. By way of contrast, cotton production was hit both by the drought and reduced acreage. The yield fell more than a third to 601 lb/ac and total production fell by more than half. The story with soybeans was similar to that of cotton. The yield fell by nearly half from 39 bu/ac to 20 bu/ac while production fell from 44 million bushels to 20 million bushels. Tobacco yields also fell as a result of the drought, declining from 2,482 lb/ac in 2006 to 1,990 lb/ac in Cattle producers were under pressure as a result of the drought and high feed prices. The lack of moisture and above normal temperatures resulted in poor pasture conditions for much of the year. In addition, hay production was down. The lack of moisture led to reduced second cuttings leaving the state short on hay stocks. Late fall rains helped green up some pastures and hay ground. One of the bright spots in agriculture is Tennessee s commitment to the development of a biofuels industry. The emphasis on developing a vibrant farm based biofuels industry holds tremendous potential for generating new farm sector income through production of switchgrass and other energy crops on marginal lands. Tennessee Agriculture Agricultural activities account for 11.7% of Tennessee s economy with $38.8 billion in output including direct (agricultural wages and product sales), indirect (locally purchased supplies and services used to support agricultural activities), and induced (purchases made by workers in agriculture houses, cars, groceries, etc.) effects. About 214,000 Tennesseans are employed by agriculture with 126,000 employed (both full and part-time) in agricultural production. In 2006 the number of farms in Tennessee continued a decadeslong decline from 274,000 farms in 1935, to 92,000 farms in 1995, to 82,000 farms in The average farm size in 2006 remained at 139 acres. About 40% of total land is in farmland, two thirds of which is Economic Report to the Governor of the State of Tennessee 29

42 Chapter 2 The Tennessee Economy: Short-Term Outlook 2.4. Situation and Outlook for Tennessee Agriculture, continued crop land. Nationally, Tennessee ranks 6 th in the number of farms, 26 th in the number of farm acres, and 44 th in average farm size. Of the 82,000 farms in Tennessee, 60,500 have sales between $1,000 and $9,999. An additional 17,500 have sales between $10,000 and $99,999, with 1,950 having sales between $100,000 and $249,000. 1,200 farms have sales between a quarter and a half million dollars and only 850 farms have total sales of $500,000 and above. One percent of all farms in Tennessee have sales of $500,000 or more and yet these farms represent 14 percent of all Tennessee farmland. The average value of agricultural land and buildings in Tennessee increased to $3,400 per acre, nearly double the 1998 value of $1,810 per acre. The cash rent per acre for cropland increased to $68 per acre up one dollar from a year earlier. Cash rent for pasture also increased one dollar to $20 per acre. Agricultural Products in Tennessee Agriculture in Tennessee is quite varied. The state s top agricultural commodities, in terms of 2006 cash receipts, include cattle and calves, broilers, cotton, greenhouse/ nursery, soybeans, corn, dairy products, tobacco, tomatoes, hay, wheat, hogs, eggs, snap beans, grain sorghum, peaches, apples, squash, sheep and lambs, and farm chickens. In 2006, all agricultural Figure 2.8. Leading Tennessee Commodities for Cash Receipts, 2006 Tobacco 4.0% Corn 6.0% Other Crops 10.0% Cattle & Calves 19.0% Cotton 13.0% Soybeans 10.0% Broilers 16.0% Nursery 11.0% Other Livestock 5.0% Dairy 6.0% Source: Tennessee Agricultural Statistics Service, Tennessee Agriculture Economic Report to the Governor of the State of Tennessee

43 Chapter 2 The Tennessee Economy: Short-Term Outlook 2.4. Situation and Outlook for Tennessee Agriculture, continued commodities in Tennessee generated more than $2.5 billion in cash receipts, slightly above 2005 levels. Crops and livestock products contributed nearly equally to Tennessee agricultural cash receipts. Figure 2.8 shows the relative share of cash receipts by commodity. One in every three dollars in market receipts in Tennessee is from cattle and calves ($481 million) or broilers ($413 million), although cash receipts for both were down from 2004 and Cash receipts for dairy products declined in 2006 to $148 million from $193 million two years earlier. In 2006, cotton regained its position as the leading cash crop with $335 million in receipts, up from $233 million the year before. Nursery and greenhouse production brought in $273 million, the same as the two previous years. Soybean receipts increased to $252 million in response to both higher prices and production. Corn receipts in 2006, dropped slightly from the previous year to $152 million. Dairy products brought in $148 million both production and price were down from a year earlier. Cash receipts from tobacco fell to $94 million. Tennessee ranks second among all states in production of equine and meat goats; third in production of tobacco; fourth in non-alfalfa hay; and fifth in snap bean production. Exports are important to Tennessee s agricultural sector with $923 million in sales in Cotton exports totaled $290 million followed by soybeans and products with sales of $291 million. Live animals and meat, excluding poultry generated export sales of $52 million. Poultry export sales were $46 million. The decline in the value of the dollar against other currencies has been of more benefit to meats and further processed agricultural products than it has been to primary crops. Meat exports and those of further processed agricultural products are more price sensitive than cotton, grains, and seeds. The US is the residual supplier of primary crops and thus exports peak when other countries experience serious production problems. In 2007 several major crop producing areas of the world experienced short crops leading to increased exports of US grains, seeds, and fiber availability, not price, became the major concern of importers. Tennessee Agricultural Sector Outlook Farm Income Net farm income for Tennessee farmers decreased from $942 million in 2005 to $722 million in Most of the decrease in net farm income is attributable to a decrease in direct government payments from $509 million in 2005 to $326 million in In 2005, 54 percent of Tennessee net farm income came from government payments while in 2006 that number fell to 45 percent. Between 1990 and 1997, government payments accounted for 15 percent of net farm income in Tennessee. By way of contrast, between 1998 and 2006, 48 percent of net farm income for Tennessee farmers came from government payments. Tennessee s increased dependence on direct government payments reflects what was happening for the country as a whole as a result of a change in farm policy in 1996 that moved away from supply management policies and toward policies that supplement income. The USDA estimates that, nationally, farm income for 2007 will be 48 percent above 2005 levels. The increase is primarily the result of higher crop prices and excellent harvests outside the dry southeast. Crops Outlook Corn production in 2007 was up by 40 percent despite a drought and lower yields. This increase was due to a 320 thousand acre increase in planted acres resulting in a 310 thousand acre increase in harvested acres. This large increase was triggered by high corn prices and a price structure in the market that favored corn over competing crops like soybeans and cotton. Relative Economic Report to the Governor of the State of Tennessee 31

44 Chapter 2 The Tennessee Economy: Short-Term Outlook 2.4. Situation and Outlook for Tennessee Agriculture, continued crop prices going into the 2008 crop year favor soybeans and wheat over corn and all three over cotton. If these relative prices hold until spring planting, the general expectation is that corn would give up part or all of the acreage it gained in Factors that could modify this expectation include the price of crude oil, the rate at which projected corn-to-ethanol plants come online over the next several months, and the price of ethanol. With projected 2007 crop year ending stocks of 1.8 billion bushels, corn demand, resulting from a combination of these factors, would have to increase significantly to raise the price of corn relative to the competing crops. If Tennessee pulls out of the 2007 drought, higher corn yields could result in a crop that is close in size to the 2007 crop. Likewise, given the relative price of soybeans to other crops, it is likely that soybean acres will increase. This additional acreage, combined with reasonable moisture levels, could result in a bumper soybean crop for If however, between the first of the year and planting time soybean prices were to plummet from the current near record highs, soybean acreage could remain stable with weather as the major force determining total production. Relatively high wheat prices at the end of 2007 suggest that, depending on crop conditions, winter wheat producers would increase their harvested acres relative to planted acres. After harvest, some of those acres could be double cropped to soybeans. While cotton prices are up marginally, it does not appear that the price gain relative to other crops is sufficient to recapture any of the acres lost to corn production in A recovery from the 2007 drought would also result in higher production of hay, tobacco, and other field crops. Part of what happens with Tennessee crops in 2008, depends on what happens in the southern hemisphere during their major growing season. A bumper crop of soybeans in Brazil and Argentina and good corn crop in Argentina could reduce price pressures in the US and the profitability of crop production in Tennessee during the 2008 crop year. Another concern facing Tennessee farmers is increased prices for inputs liker fuel and fertilizer. If oil prices remain near the $100 a barrel level, the cost of diesel fuel could increase significantly. Because fertilizer and farm chemical production and/or transportation are heavily dependent upon fuel prices, high crude oil prices could drive those prices up as well, reducing the profit margins for Tennessee farmers. Higher crop prices could trigger higher land rental rates as well, further increasing input costs. Livestock Outlook With drought conditions and high feed prices, 2007 was a challenging year for livestock producers. The cost of gain per hundred weight was in the $70s in 2007 compared to the previous five year average around $53. For the first ten months of 2007, livestock producers sent 20 thousand head of cattle to slaughter compared to 12.6 thousand in 2006, and 12.2 thousand in At the same, time cattle prices were generally below those of a year earlier, putting pressure on cattle profitability. The market is currently near the bottom of a cattle cycle that peaked in 1996 and hit cycle lows in After two years of gains beef production is expected to be down 0.3 percent in 2008.The strong Canadian dollar has the potential to reduce the number of cattle entering the US from north of the border, resulting in slightly higher prices in As long as feed prices remain high, cattle producers will face pressure on their profitability. Higher priced feed has feedlots favoring heavier feeders over lighter weights. In 2007, cattle exports continued their recovery from the BSE (bovine spongiform encephalopathy) lows of Exports in 2007 of 1.5 billion pounds are still below 2003 levels of 2.5 billion pounds. Export markets are needed to boost demand 32 Economic Report to the Governor of the State of Tennessee

45 Chapter 2 The Tennessee Economy: Short-Term Outlook 2.4. Situation and Outlook for Tennessee Agriculture, continued to absorb any future production increases. In 2006, wholesale broiler prices were above the 2005 and 2006 levels. Nationally, broiler production was down 0.2 percent in Broiler exports were up by 5 percent compensating for a decline in domestic consumption. The USDA projects broiler production to grow by 2.5 percent in Hog prices in 2007 dropped below year-earlier prices as both exports and domestic demand increased. Continued high feed prices have the potential to reduce profitability. Tennessee dairy cow numbers and milk production are down from a year earlier. The January 1, 2007 dairy cow numbers are down 52,000 from Milk prices for 2007 were around $20 compared to $13.90 a year earlier. Strong export sales are supporting US milk prices. Ag Sector Issues and Opportunities Biofuels Tennessee has made an unprecedented and largely unparalleled among other states commitment to advancing a vibrant biobased industry in the state. In 2007, the Tennessee State Legislature, with support of Governor Bredesen and a number of grassroots organizations such as the Tennessee Farm Bureau, committed more than $70 million over five years to fund the Tennessee Biofuels Initiative. The Biofuels Initiative is a comprehensive plan to position Tennessee in a strategic leadership position in the development of a commercially viable biofuels industry, based on second generation cellulosic biofuels technology. Industry experts agree that there is an approaching upper limit on the potential to expand corn ethanol production in the U.S. without significant disruptions to other sectors of agriculture and the general economy. New technologies, favorable markets, and other policy driven incentives are focusing attention on using biomass materials either from dedicated non-food energy crops or forest-based resources as abundant and sustainable sources of transportation fuel. Through the Biofuels Initiative, led by the University of Tennessee s Institute of Agriculture, Tennessee is focusing on two primary elements of developing a bioenergy industry: (1) working with local farmers to grow 8,000 acres of switchgrass as a dedicated energy crop and developing an integrated farm-based biomass supply chain, and (2) constructing and operating a 5 million gallon per year cellulosic biorefinery to demonstrate the conversion technologies, facilitate further research, and allow industrial process scale up to full commercial size. The Biofuels Initiative is a good fit with a recent $135 million investment by the U.S. Department of Energy in the Bioenergy Science Center (BESC), a research collaborative coordinated by Oak Ridge National Laboratory. The BESC focuses largely on some of the fundamental science and technology issues around producing cellulosic biofuels. The emphasis on developing a vibrant farm based biofuels industry holds tremendous potential for generating new farm sector income through production of switchgrass and other energy crops on marginal lands. There are also significant opportunities for rural economic development around the cellulosic biofuels industry, as biomass transportation costs will likely lead commercial biorefineries to locate near productive farming regions in rural areas of the state. While the Biofuels Initiative efforts are largely pilot scale and research oriented today, they are expected to lead to widespread commercial expansion in the state within five years. Tennessee Agricultural Enhancement Initiative The Tennessee Agricultural Enhancement Program (TAEP), is focused around three initiatives: the Cattle Improvement Initiative, the Agricultural Growth Economic Report to the Governor of the State of Tennessee 33

46 Chapter 2 The Tennessee Economy: Short-Term Outlook 2.4. Situation and Outlook for Tennessee Agriculture, continued Initiative, and the Animal Health Initiative. TAEP is aimed at improving farm income of Tennessee farmers by providing education, technical advice, and cost sharing programs for specific activities. The funding for this program is provided by the state. The Tennessee Cattle Improvement Initiative provides cost-share funds for the improvement of beef and dairy cattle genetics and livestock handling facilities. In order to be eligible for cost-share funds under both the Cattle Genetic Improvement Program and the Cattle Handling Facilities Program, producers must register their livestock farms, or premises, for the National Animal Identification System. Producers must be a resident of Tennessee and must own a minimum of 10 cows. Producers must also be certified under the Beef Quality Assurance Program, a two-hour educational course on cattle management and care sponsored by the Tennessee Cattlemen s Association. The Cattle improvement Initiative also includes: Dairy and Milk Quality Cost share; a Feeder Cattle Incentive; and Hay Storage and Feed Storage cost share programs. The purpose of the Producer Diversification Program, a part of the Agriculture Growth Initiative, is to increase farm income in Tennessee by encouraging producers to expand and improve their operations through production of diversified agricultural products. This goal will be achieved by providing cost share funds for farmers to install farm infrastructure, purchase specialty equipment and market their diversified farm products. Diversified agricultural products include agritourism, aquaculture, bees, fruits & vegetables, goats & sheep, horticulture, organics, valueadded products, viticulture, and others as approved by the Tennessee Department of Agriculture. Other programs under the Agricultural Growth Initiative include: Producer Association Grant; Farmers Market Promotion and Retail Grant, and Farmers Market Capital Development. The purpose of the Animal Health Initiative is to improve livestock management capabilities, increase the marketability and reputation of Tennessee livestock while facilitating the participation in the National Animal Identification System. Included in the initiative is to improve and enhance the state s animal diagnostics capabilities in order to improve domestic and foreign animal disease diagnosis and prevention. A portion of Ag Enhancement Initiative dollars are being used to help fully integrate Tennessee into the Voluntary USDA National Animal Identification System to enable 48-hour traceback of any diseased or exposed livestock. Cost share funds are available to charter livestock markets and to equine owners to help transition to an animal tracking system. And, the Tennessee Department of Agriculture is partnering with key educational institutions to expand animal disease diagnostic capabilities regionally. These programs work together to not only safeguard livestock health but to help ensure producer access to markets in the future. For Fiscal Year 2008, the third year for TAEP, the amount appropriated for the program is $26 million. Information about the program can be found at tn.us/agriculture/enhancement/index.html. Future Farm Policy The 2007 Farm Bill (soon to be the 2008 Farm Bill) debate has been shaped in large part by high commodity prices and the Federal Budget deficit. High prices, driven by the demand for corn for ethanol production, have been incorporated into baseline budget assumptions, This resulted in lower expected payments for the Marketing Loan Program and the Counter- Cyclical Payment Program and thus a much smaller budget allocation than was available at the time of the development of the 2002 Farm Bill. The lower budget allocation combined with the budget deficit reduced 34 Economic Report to the Governor of the State of Tennessee

47 Chapter 2 The Tennessee Economy: Short-Term Outlook 2.4. Situation and Outlook for Tennessee Agriculture, continued the maneuvering room legislators had to reshape the new farm legislation. As of the end of December 2007, both the House and the Senate have passed farm legislation, though the versions differ in a number of ways. It is expected that a Conference Committee will be convened early in 2008 to reconcile the differences. Given the threat of a Presidential veto for either of these two bills, the future of a reconciled bill is uncertain unless legislators agree to some of the administration s demands. Economic Report to the Governor of the State of Tennessee 35

48 Chapter 3 The Tennessee Economy: Long-Term Outlook The Tennessee Economy: Long-Term Outlook In this chapter 3.1. Introduction 3.2. Long-Term Historical Trends Employment Trends State Gross Domestic Product and Per Capita Personal Income Population and Labor Force 3.3. Long-Term Economic Outlook Business Leaders Attitudes Toward Education in Tennessee Income and Output 3.4 Tennessee s Economic Outlook Labor Market Outlook Income and Output 3.1. Introduction Previous chapters have considered the short-term outlook for the national and state economies. This chapter takes a longer-term perspective by considering historical trends dating back to the 1990s and presenting projections of the economic outlook through Highlighted in the discussion that follows are labor force trends and an assessment of public education and workforce quality by Tennessee business leaders. Labor force trends receive focused attention since they have an important bearing on economy-wide growth. Labor force growth in Tennessee is expected to slow after 2010 as a result of lower fertility rates and the retirement of the Baby Boom population. This will slow overall rates of economic growth for the state and the nation. Education is highlighted because of its importance to the path of economic development and its impact on quality of life. Economic Report to the Governor of the State of Tennessee 37

49 Chapter 3 The Tennessee Economy: Long-Term Outlook 3.2 Long-Term Historical Trends Employment Trends Job growth in Tennessee between 1997 and 2007 lagged both the national and southeastern state averages as shown in Figure 3.1. The state saw jobs grow 8.6 percent over this period of time compared to 12.4 percent growth for the national economy. Florida s job growth has been rather spectacular, coming in at nearly 27 percent, more than twice the pace of job growth for the nation. Louisiana is at the bottom with 3.6 percent growth, a legacy of Hurricane Katrina. The pattern across states is similar for the more recent time window, with Tennessee trailing the nation and placing seventh among the southeastern states. Figure 3.2 shows county-level job growth across Tennessee for 2000 to Forty-nine counties experienced job losses over this period of time. Bledsoe, Giles, Lauderdale, Lawrence, Marshall, Morgan and Pickett counties all endured jobs losses in excess of 20 percent, led by a 45.1 percent setback in Bledsoe County. On the other hand, 20 counties enjoyed job gains greater than 10 percent between 2000 and Cheatham, De Kalb and Williamson counties had the strongest rates of job growth, in each case in excess of 30 percent. De Kalb County led the state with 39.1 percent job growth. Job growth and population growth tend to go hand in hand. Between 2000 and 2006, the state s population grew more slowly than the nation (see below), but ahead of the overall pace of job growth in the state. Figure 3.3 illustrates the pattern of population growth across Tennessee counties between 2000 and It is striking that 17 counties experienced a net outflow of people during this period of time. While there are exceptions, many of the counties that lost population between 2000 and 2006 also lost jobs. In many instances the population losses are quite modest, as with Obion, Polk, Giles, Jackson, Houston and Wayne counties where the population losses were less than 1 percent. The population drain was most significant in Lake and Weakley counties where the losses totaled 6.9 percent and 4.4 percent. Figure 3.1: Total Nonfarm Employment Growth, U.S. and Southeastern States: 1997 to Percentage Change FL VA GA NC U.S. SC AR TN KY AL WV MS LA Source: Bureau of Labor Statistics. 38 Economic Report to the Governor of the State of Tennessee

50 Chapter 3 The Tennessee Economy: Long-Term Outlook 3.2 Long-Term Historical Trends, continued Figure 3.2. Annual Private Employment Growth: 2000 to 2006 Tennessee: 1.6 Percent Loss of 10.0% or more 0.0% to -9.9% 0.1% to 9.9% 10.0% or more Source: Bureau of Labor Statistics. Figure 3.3. Population Growth: 2000 to 2006 Tennessee: 6.1 Percent Loss of population 0.1% to 5.0% 5.1% to 10.0% 10.1% to 15.0% Gain of 15.1% or more Source: U.S. Census Bureau. Manufacturing has been a primary source of job losses across the state and the nation, with 1998 being the last year either economy added a net new job in the industrial sector. Figure 3.4 puts the situation in perspective for Tennessee counties using data drawn from the U.S. Census Bureau s County Business Patterns series. In some instances the manufacturing sector job losses are staggering, as with Polk, Bledsoe, Roane and Morgan counties where the setbacks have exceeded 70 percent. It is equally striking that 21 counties were able to engineer job gains and fight the overall pattern of job decay. While employment in manufacturing is contracting, so too is the number of manufacturing plants as illustrated in Figure 3.5. Almost all sectors of manufacturing have seen plant contraction, with the largest losses in apparel and textile mills. Lake County, which had a small number of industrial facilities, saw all of these leave the county between 1998 and Many other counties shed a significant number of establishments over the same window of time. But like Economic Report to the Governor of the State of Tennessee 39

51 Chapter 3 The Tennessee Economy: Long-Term Outlook 3.2 Long-Term Historical Trends, continued the employment situation discussed immediately above, a good number of counties 24 in total were able to support net gains in the number of manufacturing facilities. A comparison between Figures 3.4 and 3.5 shows that there is not always a direct correspondence between changes in the number of plants and changes in employment. State Gross Domestic Product and Per Capita Personal Income The most recent data on inflation-adjusted state gross domestic product (SGDP) are for 2005 when growth tallied 2.8 percent. Manufacturing jobs fell 0.7 percent in 2005 implying decent gains in average worker productivity. Projections for 2006 and 2007 indicate SGDP growth of 3.7 percent and 3.3 percent. Personal income consists of income from all sources, including wages and salaries, proprietors income, rents, interest, dividends and transfer payments (including social security and welfare payments). Per capita income is a good proxy measure of quality of life since it captures the average ability to purchase goods and services from the market. Tennessee and most other states within the southeast have long lagged continued on page 42 Figure 3.4. Percent Change in Manufacturing Employment: 1997 to 2006 Source: Bureau of Labor Statistics. Figure 3.5. Percent Change in Number of Manufacturing Establishments: 1998 to 2005 Source: County Business Patterns. 40 Economic Report to the Governor of the State of Tennessee

52 Chapter 3 The Tennessee Economy: Long-Term Outlook 3.2 Long-Term Historical Trends, continued Volatility The national economy is flirting with a recession and the Federal Reserve has moved its policy focus away from containing inflation to ensuring stronger economic growth via reductions in the Federal Funds rate. While economic growth is slowing, some may be surprised to know that the boom and bust pattern of the business cycle has become much less pronounced in the last 20 years. This is true of the U.S. as well as the broader global economy. The recession of the early 1980s was the most serious economic contraction dating back to the Great Depression. The more muted swings in the economy since that time can be attributed to a variety of factors, including more careful government interference in the economy by both fiscal and monetary authorities. This new period has been referred to as the Great Moderation. The following two figures illustrate the nature of this moderation of market activity. The first shows the dampened volatility of market output; i.e., GDP, in the aftermath of the recovery from the recession of the early 1980s. While swings in GDP have continued, the swings are much more modest than in the pre-1980s period. volatility scale Volatility of U.S. GDP, 1960 to Source: Bureau of Economic Analysis. The second figure shows more dramatic stabilization of inflation for the national economy after Like GDP, there continues to be up and down movement across time, but inflation has shown a significant degree of stabilization. percentage change, same month last yr Inflation Based on change in Consumer Price Index, seas. adjusted. Source: Bureau of Labor Statistics. What is the source of reduced macroeconomic volatility? There are a number of explanations. First are improvements in the structure and timing of monetary and fiscal policies, including an increased focus of monetary policy on combating inflation. Second is the liberation of markets generally, but in particular financial markets. Improvements in technology also deserve credit, as businesses especially those in manufacturing can now better manage their inventories and avoid undo increases that might otherwise lead to layoffs. Finally, there has been a run of good luck as the economy has been able to avoid significant adverse shocks like the oil crisis of the late 1970s. But it is not yet time to write an obituary for the business cycle. For more information, see com/economistsview2007/01/the_great_moder.html and bu_oct05/change_nature_bus_cyc.html. Economic Report to the Governor of the State of Tennessee 41

53 Chapter 3 The Tennessee Economy: Long-Term Outlook 3.2 Long-Term Historical Trends, continued the nation in per capita personal income. A primary explanation is relatively lower levels of educational attainment among the states within the region. Per capita personal income figures are illustrated in Figure 3.6 for the southeastern states and the U.S. as a whole for 1990, 2000 and Tennessee is now placed 4 th among the states shown, moving up one notch from 2000 by overtaking neighboring Georgia. Per capita income in Tennessee was 88.4 percent of the national average in 2006, compared to 87.8 percent in 2000 and 85.7 percent in Mississippi continues to trail all southeastern states with 2006 per capita income of $26,908, while Virginia continues to hold the top spot with income averaging $39,564. Population and Labor Force Population growth rates reflect the complex dynamics of human biology and behavior, and market forces. Fertility and death rates are important to population changes, but these rates tend to be quite stable over relatively short periods of time. Interstate migration can have a significant bearing on net changes in a state s population, both in the short run and the long run. (A good example is the outflow of population from Louisiana in response to the devastation caused by Hurricane Katrina.) Migration patterns are heavily influenced by the relative attractiveness of a place to live and work. Overall population growth rates in turn have an important bearing on economic growth since the size of the population affects the size of the labor force that businesses can draw upon for support. Population growth rates for the state and the nation are expected to slow over time due to lower fertility rates. Slower population growth coupled with the retirement of the Baby Boom generation will translate into slower rates of growth in the labor force and thus lower rates of economywide growth by the end of the long-term forecast period (2017). Slower aggregate economic growth is not a problem in and of itself. For example, per capita income can still grow at rates that support improvements in the quality Figure 3.6: Per Capita Personal Income, U.S. and Southeastern States: 1990, 2000, and ,000 35,000 $39,564 $36,665 $36, current dollars 30,000 25,000 20,000 15,000 $32,338 $32,305 $32,025 $31,369 $30,841 $29,719 $29,688 $28,444 $28,067 $26,908 10,000 5,000 Source: Bureau of Economic Analysis. 0 VA FL U.S. NC TN GA LA AL KY SC AR WV MS 42 Economic Report to the Governor of the State of Tennessee

54 Economic Report to the Governor of the State of Tennessee 43 Age Group Table 3.1. Population, U.S. and Southeastern States: 1997, 2007, and 2020 Change, 1997 to 2007 Change, 2007 to 2020 Area Number Percentage Number Percentage United States 267,783, ,621, ,804,546 33,837, ,183, Alabama 4,320,281 4,627,851 4,728, , , Arkansas 2,524,007 2,834,797 3,060, , , Florida 14,683,350 18,251,243 23,406,525 3,567, ,155, Georgia 7,486,094 9,544,750 10,843,753 2,058, ,299, Kentucky 3,907,816 4,241,474 4,424, , , Louisiana 4,351,390 4,293,204 4,719,160-58, , Mississippi 2,731,826 2,918,785 3,044, , , North Carolina 7,428,672 9,061,032 10,709,289 1,632, ,648, South Carolina 3,790,066 4,407,709 4,822, , , Tennessee 5,378,433 6,156,719 6,780, , , Virginia 6,732,878 7,712,091 8,917, , ,205, West Virginia 1,815,588 1,812,035 1,801,112-3, , Source: U.S. Census Bureau. Level* Change* Percentage change Annual growth rate (%) to 19 yrs 7,926 7,806 7,281 5, , to 24 yrs 15,441 13,377 15,113 14,955-2,064 1, to 34 yrs 34,591 33,833 32,573 37, ,260 4, to 44 yrs 27,232 36,556 35,848 33,654 9, , to 54 yrs 17,739 26,397 35,146 35,083 8,658 8, to 64 yrs 11,894 12,146 19,984 27, ,838 7, to 74 yrs 2,594 3,194 4,404 8, ,210 3, yrs and older ,080 1, *thousands Source: Bureau of Labor Statistics.. Table 3.2. U.S. Civilian Labor Force by Age: 1986, 1996, 2006, and Long-Term Historical Trends, continued Chapter 3 The Tennessee Economy: Long-Term Outlook

55 Chapter 3 The Tennessee Economy: Long-Term Outlook 3.2 Long-Term Historical Trends, continued of life even if overall personal income grows at more modest rates. But some secondary problems are expected to emerge over the course of the next decade as population and labor force growth rates slow. One problem, discussed in various parts of this chapter, is that the retirement of large numbers of individuals from the Baby Boom generation will mean the loss of an enormous pool of skilled labor. (The Baby Boom working population is estimated to be 77 million.) This will occur at the same time that employers increase their demand for better skilled workers to enable them to compete in the global economy. Relatively high dropout rates, low educational attainment rates and rapid growth in a largely unskilled Hispanic population will aggravate the difficulty employers in Tennessee will have in recruiting and retaining skilled workers. As shown in Table 3.1, the population of the U.S. is projected to increase from 301 million in 2007 to 335 million in 2020, an increase of 11.3 percent. The shorter historical window of produced a 12.6 percent increase in the nation s population. Tennessee will record a 10.1 percent change in population between 1997 and 2020, which is noticeably slower than the 14.5 percent change in population between 1997 and Tennessee places 5th among the southeastern states in terms of anticipated population growth by 2020, trailing Florida, North Carolina, Virginia and Georgia. The only southeastern state expected to lose population is West Virginia. The labor force participation rate is the share of the adult non-institutional population that is either working, or unemployed and actively seeking employment. The nation s labor force participation rate is expected to decline to 62.9 percent in 2017 from 64.4 percent in 2007 (see Figure 3.7). The labor force participation rate in Tennessee is expected to follow the national trend, falling from 63.5 percent in 2007 to 63.0 percent in Slower labor force growth will mean slower job growth for both the state and the nation (see the forecast discussion below). Employers will be forced to incur high costs in recruiting and training younger workers as Baby Boomers retire. Expect employers to create novel incentives to help keep aging workers on the job. Figure 3.7: Labor Force Participation Rate, U.S. and Tennessee: 1990 to TN U.S. Participation Rate (%) Source: Global Insight, Inc. and CBER-UT. 44 Economic Report to the Governor of the State of Tennessee

56 Chapter 3 The Tennessee Economy: Long-Term Outlook 3.2 Long-Term Historical Trends, continued Table 3.2 shows detail on how the workforce is expected to evolve by 2016, including some historical figures for perspective. Between 2006 and 2016, the projected number of individuals in the civilian labor force in the 16 to 19, 20 to 24, and 35 to 64 age groups will decline. The highest rate of decline is expected to occur in the 16 to 19 age group, with a drop of 19 percent, or about 2.1 percent on compound annual basis. At the same time, the number of people in the labor force in the 65 and older groups is expected to increase sharply. From 2006 to 2016, the number of people in the labor force in the 65 to 74 age group will increase by 83.4 percent, while the number in the 75 years and older age group is expected to see a 84.3 percent increase. Women represent less than one-half of the market workforce, but they have had stronger labor force growth rates than their male counterparts as shown in Figure 3.8. This general pattern will not change in the years ahead, though growth rates for both men and women will slow. Women now have higher labor force participation rates than men. The labor force participation rate of men is projected to grow at a compound annual rate of 0.9 percent versus 1.0 percent for women between 2006 and 2016, yielding cumulative growth rates under 10 percent. The Hispanic population will play a key role in the economy during the next decade. From 2006 to 2016, the Hispanic population group in the U.S. civilian labor force will grow by 29.9 percent. On the other hand, the black population group will increase by 16.2 percent and the white population group will increase by 5.5 percent. (See Figure 3.9.) With educational attainment levels drifting up and employers demanding more skilled workers, general workforce education levels should rise over the next ten years. Many green workers with higher levels of educational attainment will be replacing Baby Boomers who possess significant onthe-job skills. Immigrants are expected to play an important role in replacing continued on page 48 Figure 3.8: U.S. Labor Force Growth by Gender Women Men 2006 to 2016 projected to to Source: Bureau of Labor Statistics. percentage change Economic Report to the Governor of the State of Tennessee 45

57 Chapter 3 The Tennessee Economy: Long-Term Outlook 3.2 Long-Term Historical Trends, continued Figure 3.9: U.S. Labor Force Growth by Race and Ethnicity 2006 to 2016 projected Hispanic Black White 1996 to to percentage change Source: Bureau of Labor Statistics. Figure 3.10: Educational Attainment of the U.S. Hispanic Population Aged 18 Years & Older: 2007 Less than high school 38.8% High school diploma/ged 29.3% Doctoral degree 0.3% Some college, no degree 14.9% Professional degree 0.5% Source: U.S. Census Bureau. Master's degree 2.0% A ssoc degree, occupational 2.7% Bachelor's degree 8.3% A ssoc degree, academic 3.1% 46 Economic Report to the Governor of the State of Tennessee

58 Chapter 3 The Tennessee Economy: Long-Term Outlook 3.2 Long-Term Historical Trends, continued Social Security The social security program is a pay-as-you-go retirement system. Workers and their employers contribute taxes that are deposited into a trust fund to support payments to retirees. Workers pay a 6.2 percent tax, along with their employers, yielding a total tax of 12.4 percent on earnings. Income subject to Social Security tax is capped at $94,200. Funding Social Security payments for future retirees has received considerable attention due to a fundamental gap that will emerge between current workers contributing to the program and retirees drawing their annuity payments. In the near term this is not a problem because the Social Security system has developed a large trust fund balance. But these trust fund balances have been invested in government securities, and retiring the securities will require higher taxes, lower benefits or some combination of the two. There is no painless way out of this problem. Social Security is important to most American households. An estimated 163 million workers, or 96 percent of all workers, are currently covered under Social Security. At the same time, 52 percent of the workforce has no private pension coverage and 31 percent of the workforce has no savings set aside specifically for retirement. One way of looking at the funding dilemma is to consider the number of workers who are contributing Social Security payments to fund annuity payments for the stock of retirees. In 1955, there were 8.6 workers supporting each retiree, but in 2007 the ratio had slipped to 3.3 workers per beneficiary. Current projections have the ratio of workers to retirees decreasing further until it reaches 2.1 workers per beneficiary in 2032 and 1.8 workers per beneficiary in Aggravating the woes of Social Security has been the increased life expectancy of the population which extends the period of annuity payouts. Social Security Administration, Number of Workers per Social Security Beneficiary 18.0 covered workers per beneficiary workers per beneficiary 3.3 workers per beneficiary 1.8 workers per beneficiary Source: Social Security Administration, The Future of Social Security, May Economic Report to the Governor of the State of Tennessee 47

59 Chapter 3 The Tennessee Economy: Long-Term Outlook 3.2 Long-Term Historical Trends, continued upcoming retirees. However the growing number of immigrants will not be enough to replace the retiring Baby Boomers. Moreover, many of these immigrants have relatively low levels of educational attainment. Nationwide, Hispanics represent the fastest growing population group and nationally represent about 13 percent of the entire U.S. population. The latest U.S. Bureau of the Census figures that show Tennessee s Hispanic population has increased by 35 percent since 2000 and now accounts for almost 3 percent of the state s population. Nationally, only 11.1 percent of the Hispanic population group has a bachelor s degree or higher (see Figure 3.10). To put these figures in perspective, more than half of Asians 25 years and older hold at least a bachelor s degree (52 percent), compared with 32 percent of non- Hispanic whites, and 19 percent of blacks. Figure 3.11 sheds light on the educational attainment of the immigrant population in Tennessee based on data for Native Tennesseans trail other U.S. states, as well as immigrants from the Philippines and India, in both the share of adults with a high school degree and advanced degrees. Native-born Tennesseans lead Chinese immigrants in the state in terms of a high school education, but Chinese immigrants tend to have more advanced degrees. Immigrants from Mexico who live in Tennessee tend to have very low levels of attainment, similar to their counterparts in other states as shown above. Figure 3.11: Educational Attainment of Tennessee s Immigrant Population by Place of Nativity: 2000 Native-born Tennesseans: 80.5% High School Education or Higher 8.7% Master s, Professional, or Doctorate Degree percentage of Tennessee's immigrant population High School Education or Higher Master's, Professional, or Doctorate Degree 0.0 Mexico Vietnam China Other U.S. states Philippines India Source: U.S. Census Bureau, Census Economic Report to the Governor of the State of Tennessee

60 Chapter 3 The Tennessee Economy: Long-Term Outlook 3.3 Long-Term Economic Outlook The long-term outlook presented below is a trend forecast of economic conditions that are expected to prevail over the course of the next ten years. As is typical of a trend forecast, there are no business cycles built into the outlook beyond the current slowdown and its anticipated rebound by Long-term economic performance is affected heavily by growth in the population and labor force, as was discussed above. Since the labor force is expected to grow more slowly, especially in 2012 and beyond, broad measures of economic growth for the state will also slow. Other key factors affecting long-term economic performance include investments in private production capacity including buildings, equipment and computer technology; investments in human capital or education; and investments in public infrastructure like roads and highways. The discussion of the long-term outlook below is broken up into two broad sections. First is an examination of a survey that was administered to businesses in Tennessee regarding their attitudes toward education. The issue of education is important because of the way education affects worker productivity, worker earnings and overall economic performance. The final major section of the chapter presents the economic forecast through Business Leaders Attitudes Toward Education in Tennessee The long-term outlook for the state and the nation points to much slower growth in the labor force and a potentially serious shortage of skilled workers in the years ahead, as is discussed above. These workforce changes are anticipated because of fundamental demographic shifts including the retirement of large numbers of workers from the Baby Boom generation. Slower growth in the workforce will translate into slower rates of economy-wide growth, while a shortage of skilled workers will mean further outsourcing of jobs, either abroad or to domestic locations where there are greater numbers of skilled workers. Many employers in Tennessee today have difficulty finding and retaining skilled workers. The long-term outlook suggests that this problem will become more acute in the next ten years which could hamper the state s path of economic development. In 2007 the Center for Business and Economic Research administered a survey to businesses that have a presence in Tennessee to assess their attitudes toward education and the quality of the workforce. The survey was administered electronically with the assistance of the Tennessee Chamber of Commerce and Industry and yielded 618 completed surveys. The survey provides an invaluable assessment of how Tennessee business leaders feel about the quality of public education, the role education plays in business competitiveness and skill levels of the workforce. Comparing today s workforce to the workforce of 1997, 42.4 percent of the businesses said the quality of the workforce had stayed the same, while 30.4 percent said quality had declined and the remaining 27.1 percent believed workforce quality had increased. If one believes that improvements in the workforce are necessary to enable businesses to compete in the modern global market place, these responses are not encouraging. Over 73 percent of businesses surveyed said that a skilled workforce was important or very important to their competitiveness, while 73.5 percent of the respondents thought investments in education and a skilled workforce were important or very important to their ability to compete in the global economy of the future. Regardless of location, more firms said that the quality of the Tennessee workforce had stayed about the same over the last ten years than decreased or increased. However, more businesses located in metropolitan areas believe the quality of the workforce increased (30.8 percent) Economic Report to the Governor of the State of Tennessee 49

61 Chapter 3 The Tennessee Economy: Long-Term Outlook 3.3 Long-Term Economic Outlook, continued than decreased (27.8 percent). Among firms located in the suburbs, 24.1 percent thought the quality of the workforce had increased, but 30.6 percent thought that it had decreased over the last ten years. This result was more pronounced in rural areas where only 19.5 percent of firms believed workforce quality increased and 36.9 percent thought it decreased. Business leaders were asked to assess the educational attainment level of their current employees. The average business reported that more than one-half of their workers (nearly 57 percent) have only a high school diploma or GED. Over a third (38 percent) said their workers have at least a four-year college degree. As discussed below in the outlook section, the most rapidly growing occupations in Tennessee and in the nation require some form of post-secondary education. The most rapidly declining occupations require only a high school diploma or GED. Several questions on the survey dealt with what Tennessee business leaders perceive the quality of the future Tennessee workforce to be. Most respondents expressed concerns regarding the preparedness of the state s future workforce by indicating that it will be difficult to find qualified workers. About two-thirds (66.2 percent) think it will be much harder or harder to find qualified workers in Tennessee s workforce over the next decade. Only a scant 9.9 percent of respondents said they expect the challenge of finding qualified Tennessee workers will be easier or much easier. That leaves 23.9 percent who predict hiring challenges will be about the same as they are currently. Profile of Business Survey Respondents The survey respondents come from a diverse cross section of Tennessee businesses. Singlelocation enterprises accounted for 54.2 percent of the business responses, while the remaining 45.8 percent were multiple-location enterprises. Some firms were in their infancy, while at least one had been in operation 200 years. The typical respondent firm averaged about 32 years in operation. The average respondent employed 448 people, while the median firm had only 29 employees, indicating the inclusion of a small number of very large employers in the overall survey. Only 25.0 percent of respondents were located in a rural area of the state, while the majority of firms were located in a metropolitan area (56.8 percent). The remaining respondents reported their Tennessee location to be suburban (18.2 percent). The location of the headquarters of the firms varied. Over half of the respondent firms (56.7 percent) were headquartered in Tennessee, 41.2 percent had headquarters in another state, and the remaining 2.1 percent were headquartered outside the U.S. In terms of primary market regions, the respondents were quite diverse. Nearly 36 percent of respondents said that their primary market region was local (Tennessee only), 31.4 percent pursued a regional market, 22.8 percent a national market, and 10.2 percent an international market. The businesses surveyed also represented a relatively diverse group of industries. Nearly a fifth of the businesses (19.5 percent) were in financial activities, 19.7 percent were in manufacturing, and 15.3 percent were in professional and business services. The remaining firms were scattered across an array of industries including trade, transportation, utilities, and education and health. 50 Economic Report to the Governor of the State of Tennessee

62 Chapter 3 The Tennessee Economy: Long-Term Outlook 3.3 Long-Term Economic Outlook, continued Figure 3.15 illustrates business leaders assessment of the preparedness of the workforce by education level. In the eyes of the surveyed businesses, workers with more education are more adequately prepared for entry-level positions while workers with less education are more likely to be poorly prepared for an entry-level job. In particular, the vast majority of companies (about 91.0 percent) indicated that applicants with a bachelor s degree were more adequately prepared for an entry-level job than individuals with a two-year college degree or a high school diploma. Nearly 60 percent deemed individuals with only a high school diploma or GED to be poorly prepared for an entry-level job. Among smaller firms (those with 100 employees or less), 75.5 percent of the workforce with two-year vocational Figure 3.12: Perceived Changes in the Quality of the Tennessee Workforce over the Last 10 Years Stayed about the same 42.4% Decreased 30.4% Increased 27.1% Source: CBER-UT, Tennessee Business Leaders Survey, 2007, unpublished survey results. Figure 3.13: Perceived Changes in the Quality of the Tennessee Workforce over the Last 10 Years by Firm Location percentage Metro Area Suburbs Increased Stayed the same Decreased Rural Area Source: CBER-UT, Tennessee Business Leaders Survey, 2007, unpublished survey results. Economic Report to the Governor of the State of Tennessee 51

63 Chapter 3 The Tennessee Economy: Long-Term Outlook 3.3 Long-Term Economic Outlook, continued or technical training was assessed as adequately prepared. For larger firms (those more than 100 employees), this number was 90.9 percent significantly higher than the relatively smaller firms. Among small firms, 88.6 percent of the workforce with a four-year college degree was adequately prepared for an entry-level position. Among large firms, 95.7 percent of workers with a four-year degree were viewed as adequately prepared. Table 3.3 shows the responses from firms when they were asked to identify the most important factors that would support their success in the future. (Note that firms could respond to more than one of the criteria.) About two-thirds of Tennessee business leaders value a high performance workforce as a key component to their future success. About 46 percent of respondents place value Figure 3.14: Expectations of the Future Tennessee Workforce 45.0 The l evel of difficulty anticipated in finding qualified/educated Tennessee workers over the next 10 years percentage of responding firms Much harder Harder About the same Easier Much easier Source: CBER-UT, Tennessee Business Leaders Survey, 2007, unpublished survey results. Figure 3.15: Preparedness of the Tennessee Workforce Percentage of responding firms M ost companies indicate that applicants with a bachelor's degree are more prepared for an entry-level job than a re individuals with only a high school diploma or two-year college degree Poorly Prepared Adequately Prepared High school diploma/ged Two-yr college graduate Bachelor's degree Source: CBER-UT, Tennessee Business Leaders Survey, 2007, unpublished survey results. 52 Economic Report to the Governor of the State of Tennessee

64 Chapter 3 The Tennessee Economy: Long-Term Outlook 3.3 Long-Term Economic Outlook, continued in better customer service orientation, and about 29 percent believe new product innovation to be important for future success. The survey also provides information on the training decisions that businesses make. The average amount spent per employee on training was $4,152 per year. Most respondents said they provide onthe-job training in the form of specialized technical training, supervisory training, and computer literacy training. Slightly over one third (33.7 percent) provide executive training, and 14.6 percent provide basic skills training. Many businesses also provide incentives to employees who acquire additional education. The incentives included tuition/fee reimbursements, salary increases, and paid leave to attend classes. Almost one-half of respondents indicated they had increased employee training in the past three years. This is likely a reflection of increased competitive pressures and the need to support a better-trained workforce. Since the workforce of tomorrow will be a product of today s schools, business leaders were asked to assess the quality of Tennessee s public schools. Most (53.6 percent) graded the overall quality of Tennessee s current k-12 public education system to be average (C). Less than one fifth of respondents graded Tennessee s public school quality to be above average with an A (0.5 percent) or a B (17.3 percent). Over one quarter assessed the quality of Tennessee s public school system to be below average with a D (25.2 percent) or an F (3.4 percent). When asked to compare Tennessee to the average state, most business leaders perceive the quality of the state s public education system to be about the same (43.2 percent) or worse (41.7 percent). Business leaders were also asked to assess the quality of specific aspects of public school education as summarized in Table 3.4. C grades were most common across the various areas. F grades were frequent in areas where schools may have less direct influence on student outcomes, including discipline/work ethic, initiative, leadership, and life skills. Critical thinking can be influenced by the home and community environment, as well as the classroom. Nearly one in five respondents gave public schools an F grade on this category. The arts and extracurricular activities also received a significant share of Fs, but the same category receives more As than any other surveyed category. A significant share of respondents (nearly 65 percent) said that if they were able to reallocate the Tennessee State budget they would spend more on k-12 education Table 3.3. Workforce Qualities Valued by Tennessee Businesses for Future Success Workforce Quality Percentage High-performance workforce 67.0% Increased customer service orientation 46.3% New product innovation 29.3% Low cost producer status 18.3% Sourcing products in global markets 6.0% Supply chain integration with supplies 5.0% Increasing sales outside the U.S. 4.1% None of the above 10.8% Source: CBER-UT, Tennessee Business Leaders Survey, 2007, unpublished survey results. Economic Report to the Governor of the State of Tennessee 53

65 Chapter 3 The Tennessee Economy: Long-Term Outlook 3.3 Long-Term Economic Outlook, continued (see Figure 3.16). Only about 8 percent of respondents said they would provide tax relief. This suggest that the vast majority of businesses would rather Tennessee spend more on k-12 education than provide tax breaks across the state. While businesses certainly value relatively low taxes, they cannot compete on low taxes alone and must have access to a skilled workforce. Given the responses summarized in Table 3.4, it is highly unlikely that businesses would support spending the next dollar of tax revenue on education the way the last dollar was spent. Figure 3.16: Budget Reallocation Preferences M ost business leaderss would spend more on k-12 education if given the opportunity to reallocate the state budget Spend more on... k-12 education Early childhood education Provide tax relief Higher education Infrastructure improvements Public assistance programs Source: CBER-UT, Tennessee Business Leaders Survey, 2007, unpublished survey results. Table 3.4. Grades Given to Tennessee Public k-12 Schools by Category Category A B C D F Basic skills 1.25% 20.00% 52.14% 24.46% 2.14% Computer literacy 2.69% 30.52% 45.06% 19.57% 2.15% Technical/vocational training 1.70% 25.38% 48.48% 20.64% 3.79% College prep 1.99% 23.37% 47.46% 23.37% 3.80% Providing highly qualified teachers 2.55% 23.72% 46.90% 20.07% 6.75% Arts, extracurricular activities 3.20% 22.60% 36.16% 27.12% 10.92% Discipline/work ethic 0.36% 9.66% 32.38% 40.61% 16.99% Leadership 0.54% 11.01% 46.87% 32.13% 9.75% Initiative 0.36% 9.27% 45.09% 34.55% 10.73% Life skills 0.18% 13.18% 40.61% 36.28% 9.75% Critical thinking 0.36% 7.93% 34.05% 39.28% 18.38% Source: CBER-UT, Tennessee Business Leaders Survey, 2007, unpublished survey results. 54 Economic Report to the Governor of the State of Tennessee

66 Chapter 3 The Tennessee Economy: Long-Term Outlook 3.4 Tennessee s Economic Outlook Labor Market Outlook Nonfarm employment is projected to grow at a 1.1 percent compound annual growth rate (CAGR) between 2007 and Job growth rates will peak in 2010 and 2011 at 1.4 percent before slowing in the face of slower population and labor force growth. By 2017, nonfarm job growth is projected to slip below 1.0. Natural resources and mining, manufacturing and the federal government sectors will see employment losses by 2017, while all other broad sectors of the economy expand. The largest numerical job gains will be in trade, transportation and utilities (80,700 jobs), followed by education and health services (70,500 jobs) and leisure and hospitality services (53,200 jobs). The state s manufacturing sector accounted for 390,200 jobs in 2007, but by 2017 manufacturing employment will slip to 362,500, a loss of 27,700 positions. Employment in durable goods will stay about the same, while employment in nondurable goods will contract. All broad subsectors in nondurable goods manufacturing will suffer setbacks; within durable goods manufacturing, five broad subsectors will expand while five contract. The projected winners include wood products, nonmetallic minerals, fabricated metals, electrical equipment and appliances, and transportation equipment. It should be noted that these projections, while pointing to continued setbacks, are not as bad as the experience of the last ten years. In the short run the falling dollar is expected to help the state and national manufacturing sectors. Over the longer term it is greater investments in new technology and a more skilled workforce that will support a somewhat stronger climate in manufacturing. Table 3.5 shows projections of rapidly growing and rapidly declining occupations for the state for the period. There are two striking features of the data. First, the rapidly growing occupations pay about twice the average that is received in the declining occupations. Second, the jobs that are expected to see strong growth by 2014 typically require some form of post-secondary education, while none of the occupations that are expect to decline require any post-secondary education. Growth in the civilian labor force in 2017 will be about one-half the rate of growth expected in 2010 and The state unemployment rate is projected to range between 4.9 percent and 5.0 percent after By 2017, the labor force participation rate will be one-half percentage point below the 63.5 percent rate that prevailed in Income and Output Tennessee nominal personal income should be up 4.8 percent (CAGR) between 2007 and Growth will slow some following a peak in Wage and salary income will slow from 2011 forward due to slower statewide job growth. Transfer payments, on the other hand, will grow at stronger rates beginning in 2011 as the pace of retirement picks up and social security payments increase. Per capita income will not be affected by the slowdown in overall personal income growth since population growth will be slowing as well. Expect Tennessee per capita income to rise by 3.9 percent (CAGR) through 2017, compared to 4.0 percent for the U.S. Projecting inflation-adjusted state GDP out to 2017 is problematic given that the most recent historical data point is 2005 and there are only 9 years of historical data. With this important caveat in mind, inflation-adjusted state GDP is expected to see peak growth of 3.5 percent in 2010, with growth then slowing to 2.4 percent by Economic Report to the Governor of the State of Tennessee 55

67 56 Economic Report to the Governor of the State of Tennessee Table 3.5. Projected Growth in Tennessee Occupations: 2004 to 2014 Fastest-Projected Gains Employment Change Avg Hourly Earnings Post-secondary education Occupation Number Percent Entry-level Mean (All) or training category Network Systems & Data Communications Analysts 2,680 4,410 1, % $16.75 $27.52 Bachelor's degree Court Reporters % $9.88 $31.61 Postsecondary vocational award Computer Software Engineers, Systems Software 2,740 4,270 1, % $23.10 $32.43 Bachelor's degree Database Administrators 1,450 2, % $17.08 $28.55 Bachelor's degree Computer Software Engineers, Applications 3,090 4,640 1, % $20.53 $32.45 Bachelor's degree Conveyor Operators & Tenders 2,570 3,800 1, % *** *** Short-term on-the-job training Medical Assistants 8,290 12,170 3, % $9.07 $11.38 Moderate-term on-the-job training Network & Computer Systems Administrators 3,870 5,650 1, % $18.03 $27.62 Bachelor's degree Desktop Publishers 800 1, % $9.41 $13.78 Postsecondary vocational award Physician Assistants % $20.56 $31.58 Bachelor's degree Average $16.05 $26.32 Fastest-Projected Losses Employment Change Avg Hourly Earnings Post-secondary education Occupation Number Percent Entry-level Mean (All) or training category Railroad Brake, Signal, & Switch Operators % *** *** Moderate-term on-the-job training Textile Knitting & Weaving Machine Setters, Operators, & Tenders % $7.70 $10.54 Long-term on-the-job training Meter Readers, Utilities 1, % $9.17 $14.29 Short-term on-the-job training Textile Bleaching & Dyeing Machine Operators & Tenders % $10.20 $13.33 Moderate-term on-the-job training Mail Clerks & Mail Machine Operators (excl. Postal Service) 1,790 1, % $8.51 $11.82 Short-term on-the-job training Credit Authorizers, Checkers, & Clerks 1, % $10.08 $16.31 Short-term on-the-job training File Clerks 3,700 2,430-1, % $7.43 $10.44 Short-term on-the-job training Furniture Finishers % $8.86 $12.08 Long-term on-the-job training Telephone Operators % *** *** Short-term on-the-job training Textile Winding, Twisting, & Drawing Out Machine Setters, Operators, & Tenders 1,890 1, % $8.60 $12.14 Moderate-term on-the-job training Average $8.82 $ Tennessee s Economic Outlook, continued Chapter 3 The Tennessee Economy: Long-Term Outlook Source: Tennessee Department of Labor and Workforce Development.

68 Chapter 4 Tennessee Policy Watch Policy Watch In this chapter Overview Welfare Assistance in Tennessee: A Policy Update 4a.1. Introduction 4a.2. A Brief History of Welfare Programs in the U.S. and Tennessee The AFDC Era: The 1996 Welfare Reforms The Waiver Era in Tennessee: The Welfare Reform Reauthorization of 2005 What Activities Count as Work? 4a.3. The New Families First Education as a Work Activity Time Limit Policies Tennessee s New Diversion Program Performance-Based Contracting 4a.4. Future Welfare Policy Challenges in Tennessee Education Work Activity Participation Rate Requirements Time Limits Diversion Assistance References School-to-Work: Do Tennessee s Higher Education Graduates Work in Tennessee 4b.1. Introduction 4b.2. State-Level Labor Market and Earnings Trends Participation by Degree Type Average Wages of Tennessee Graduates in the Tennessee Labor Market 4b.3. Employment and Earnings Trends by Institution The Basic Question Revisited: Working or Not Full-time Wages of Tennessee Higher Education Graduates in the Tennessee Labor Market: Comparing Institutions 4b.4. Employment and Earnings Trends by Field of Study Workforce Participation Trends among Graduates: Comparing Fields of Study 4b.5. Conclusions Overview Education and welfare together represent a sizable share of state government spending in Tennessee. Because of the importance of these programs to the state budget and the citizens of the state, the Center for Business and Economic Research has maintained an active research agenda focusing on both education policy and welfare policy. In this chapter we provide policy research briefs that share some of our findings from two recent endeavors. The first is a profile of changes made by the state legislature to the state s Families First program in the last legislative session. The second part of the chapter explores the extent to which graduates from Tennessee s institutions of higher education contribute to the state s economy. For a comprehensive look at our research on these and other state policy matters, see Economic Report to the Governor of the State of Tennessee 57

69 Chapter 4 Tennessee Policy Watch 4a. Welfare Assistance in Tennessee: A Policy Update 4a.1. Introduction Tennessee experienced several major changes to its welfare policies in the past year. Tennessee s welfare program, Families First, must now align with federal rules following the mid-2007 expiration of a waiver that enabled the state Department of Human Services (DHS) to diverge from federal rules in various ways. The purpose of this policy update is to review the most significant changes in Tennessee welfare policy since the expiration of the waiver. Following a brief historical overview of U.S. and Tennessee welfare policies, we discuss the major features of the newlyreauthorized federal welfare program. We then present an overview of the changes that were made to bring Tennessee s program into compliance with federal rules. The discussion ends with a presentationof several salient welfare policy issues on the horizon in Tennessee. 58 Economic Report to the Governor of the State of Tennessee

70 Chapter 4 Tennessee Policy Watch 4a.2. A Brief History of Welfare Programs in the U.S. and Tennessee The AFDC Era: Broad-based assistance to needy families began with the implementation of the Aid to Families with Dependent Children (AFDC) program in Throughout the course of its 61-year history, AFDC was characterized by cash payments to families with few restrictions on receiving benefits and little differentiation between states programs. The AFDC program was criticized for discouraging work effort, since benefit amounts were reduced dollar-for-dollar as labor earnings increased. The 1996 Welfare Reforms Partly in response to this criticism, a number of states including Tennessee began to reform their welfare programs in the 1980s and early 1990s, leading up to a major federal welfare reform the Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA) of PRWORA replaced AFDC with the Temporary Assistance to Needy Families (TANF) program. PRWORA was indeed a substantial departure from welfare as we knew it under the old AFDC program. The new TANF system, using block grants from the federal government to the states, gave states increased flexibility along with increased administrative and policy responsibilities. Two of the most significant changes to the welfare system were the addition of a 60-month limit on lifetime benefit receipt, and requirements that ablebodied adults engage in some form of work activity. The Waiver Era in Tennessee: Tennessee was one of the states that were granted waivers from AFDC rules before PRWORA was enacted. Some of these pre-prwora waivers, including Tennessee s, were honored and therefore Tennessee was not subject to many aspects of the reformed federal welfare program. Interestingly, Tennessee s 1996 welfare program Families First had many of the same features of the new TANF program at the time. 1 Like TANF participants in other states, Families First participants were subject to work requirements and time limits. There were a few important differences between Families First and TANF programs in other states. For one, Tennessee was among several states that opted to implement an interim time limit in addition to the 60-month requirement required by TANF. During the waiver era of Families First, recipients could receive benefits for 18 months at one time but were required to leave the program for at least three months before returning to Families First. In addition to monthly checks, support services such as education, job training, child care, transportation, and mental health services, were provided 1 For a complete summary of Families First policies see Center for Business and Economic Research (2000). Figure 4a.1. Welfare Programs History Economic Report to the Governor of the State of Tennessee 59