Economic Update. Don Bruce Research Professor Boyd Center for Business and Economic Research. January 2019

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1 Economic Update Don Bruce Research Professor Boyd Center for Business and Economic Research January 2019

2 January

3 National Economy The U.S. economy has now enjoyed 9 years of economic growth since the Great Recession With 5 more months, the longest expansion on record Real GDP grew by 4.2% in 2018Q2 and by 3.4% in 2018Q3 Nonfarm employment grew by 1.6% in Unemployment rate stood at 3.9% in December (flat throughout 2018) January

4 Tennessee Economy Personal income grew by 2.1% in 2018 Nonfarm employment grew by 1.8% in 2018 Manufacturing employment was up by about 1% The unemployment rate has been steady, around 3.5% Revenue growth has been strong Reserves and balances are in very good shape, but we could not sustain a significant recession without significant cuts January

5 Forecast Expansion continues as projected 60% Expansion picks up steam 15% Driven by stronger productivity growth and low unemployment Slowdown 25% Drop in consumer confidence, and/or slowdown in residential and commercial real estate, investment January

6 3.5 The U.S. can expect continued moderate economic growth in the next few years 3.0 Growth in Real GDP (%) Source: Bureau of Labor Statistics and IHS Markit, U.S. Economic Outlook, January 2019 (copyright). January

7 Consumers are Driving the Expansion 7.00% Percentage change (same quarter previous year) 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% -1.00% -2.00% -3.00% January

8 Light Vehicle Sales have been restored offering little capacity for further growth Unit Sales (millions) Source: IHS Markit, U.S. Economic Outlook, January 2019 (copyright). January

9 Consumer Debt Balance Rising Again Other Student Mortgage Trillions of Dollars January

Rates Rise as Economy Confronts Full Employment and Inflationary Risks Rise 6.000 5.000 Federal Funds Rate 10-Year Treasury Note Yield 3-Month Treasury Bill Rate 4.

10 Rates Rise as Economy Confronts Full Employment and Inflationary Risks Rise Federal Funds Rate 10-Year Treasury Note Yield 3-Month Treasury Bill Rate Rate (%) Source: IHS Markit. January

11 Investment may respond to tax reform over time, but limited improvement so far 8.0 Percentage Change, Previous Quarter, SAAR January

12 U.S. Nonresidential Fixed Investment: Expect Moderation as Tax Cut Stimulus Fades 25.0 Total Equipment Intellectual Property Products Structures Growth (%) Source: IHS Markit. January

13 Housing Starts Plateau Well Below Pre-recession Levels 12.0 Tennessee U.S. 2.5 Tennessee (thousands) U.S. (millions) Source: U.S. Dept. of Housing and Urban Development, State of the Cities Data Systems (SOCDS) database; UT-Boyd Center; and IHS Markit. January

14 Deficits Rise Rapidly in the Future (billions) 2028, $1, , $1, , $1, , $ , $ , $413 Source: IHS January

15 The trade deficit remains large Exports - Imports, Billions of Chained 2012 Dollars ,000.0 January

16 Tennessee and U.S. Nonfarm Job Growth (year-over-year growth) 6.0% 4.0% Tennessee U.S. Year-Over-Year Growth 2.0% 0.0% -2.0% -4.0% -6.0% -8.0% Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 January

Unemployment Rates Remain Low 12.0 10.0 Unemployment rate (%) 8.0 6.0 4.0 2.

17 Unemployment Rates Remain Low Unemployment rate (%) Tennessee U.S. U.S. Oct TN Oct January

Labor Force Participation Rates Show Signs of a Turnaround Participation Rate (%) 68.0 67.0 66.0 65.0 64.0 63.0 62.0 61.

18 Labor Force Participation Rates Show Signs of a Turnaround Participation Rate (%) recession TN U.S. Oct Oct Source: Bureau of Labor Statistics. January

19 U.S. Forecast Summary Real GDP growth at 2.5% (down from 2.9% in 2018) Driven by strong 2.6% growth in consumption Business investment growth of 4.0% Exports up by 4.1%, imports up by 6.0% Federal Funds Rate will reach 2.6% 30-year fixed mortgage rate rising to 4.8% Inflation at 2.0% Unemployment at 3.6% job growth at 1.4% January

Full Recovery from the Great Recession in Most Sectors (Tennessee, October 2018 as a Share of December 2007) Professional & Business Services Leisure & Hospitality Education & Health Services Other

20 Full Recovery from the Great Recession in Most Sectors (Tennessee, October 2018 as a Share of December 2007) Professional & Business Services Leisure & Hospitality Education & Health Services Other Services Financial Activities Total Nonfarm Trade, Transportation, Utilities Government Manufacturing Mining, Logging, Construction Information 127.8% 125.8% 124.1% 112.1% 110.0% 110.0% 103.8% 103.0% 95.4% 94.0% 88.3% Source: Bureau of Labor Statistics. 0.0% 20.0% 40.0% 60.0% 80.0% 100.0% 120.0% 140.0% January

21 MSA Nonfarm Employment Growth (Quarter Ending Sept to Sept. 2018) Chattanooga 3.1% Morristown 2.8% Memphis, TN-MS-AR TENNESSEE Jackson 2.0% 1.9% 1.9% Nashville-Davidson-- Kingsport-Bristol-Bristol, TN-VA 1.5% 1.7% Clarksville 0.8% Knoxville 0.5% Cleveland Johnson City 0.2% 0.1% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% Growth Rate (%) January

22 Total Non-farm Employment Growth (Compound Annual Growth Rates, ) 2.50% 2.00% 1.50% CAGR 1.00% 0.50% 0.00% Nashville TN Knoxville U.S Chattanooga Memphis January

23 September Unemployment Rates Remain Elevated in Rural Tennessee Tennessee: 3.7% United States: 3.6% Note: Data are not seasonally adjusted. 2.7% to 3.7% 3.8% to 4.7% 4.8% to 5.7% 5.8% to 6.5% Source: Bureau of Labor Statistics. January

24 Tennessee s Top 5 Export Markets $ Exports (bil U.S. dollars) $4.698 $2.502 $1.984 $ Canada Mexico China Japan Belgium Source: U.S. Department of Commerce, International Trade Administration. January

25 Tennessee s Top 5 Export Categories 2017 Transportation Equipment $7.589 Computer & Electronic Products $5.390 Chemicals $4.450 Misc. Manufactures $3.860 Machinery $ Exports (bil U.S. dollars) Source: U.S. Department of Commerce, International Trade Administration. January

Tennessee Employment in Foreign- Japan Germany United Kingdom France Canada Sweden Ireland Italy Switzerland South Korea Netherlands Brazil China Luxembourg Belgium Australia Spain Mexico Owned

1,878 (13) 1,855 (31) 1,186 (10) 1,116 (22) 999 foreign-based establishments with employment of 150,075 51,961 (191) 0 10,000 20,000 30,000 40,000 50,000 60,000 Notes: Countries with employment of

26 Tennessee Employment in Foreign- Japan Germany United Kingdom France Canada Sweden Ireland Italy Switzerland South Korea Netherlands Brazil China Luxembourg Belgium Australia Spain Mexico Owned Companies (Number of Employees by Country of UBO) 18,161 (121) 11,447 (115) 10,003 (79) 9,306 (75) 7,482 (34) 5,647 (38) 5,372 (40) 5,371 (48) 3,464 (15) 3,040 (47) 2,836 (13) 2,586 (21) 1,948 (6) 1,878 (13) 1,855 (31) 1,186 (10) 1,116 (22) 999 foreign-based establishments with employment of 150,075 51,961 (191) 0 10,000 20,000 30,000 40,000 50,000 60,000 Notes: Countries with employment of 1,000 or more. Number of establishments for each country shown in parentheses. Source: State of Tennessee, < accessed September 11, January

27 Narrowing the Educational Attainment Gap Percentage of population aged 25 Yrs & Older High School Graduate or Higher TN U.S Percentage of population aged 25 Yrs & Older Bachelor's Degree or Higher TN U.S Source: U.S. Census Bureau, American Community Survey (5-Year Estimates, various years). January

28 Unemployment Rate and Earnings Highly Correlated with Educational Attainment 2017 Unemployment Rate (%) 2017 Median Weekly Earnings Less than a high school diploma 6.5 Less than a high school diploma $520 All workers $907 High school diploma 4.6 High school diploma $712 Some college, no degree 4.0 Some college, no degree $774 Associate's degree 3.4 Associate's degree $836 Bachelor's degree 2.5 Bachelor's degree $1,173 Master's degree 2.2 Master's degree $1,401 Professional degree 1.5 Professional degree $1,836 Doctoral degree 1.5 All workers 3.6% Doctoral degree $1, $0 $1,000 $2,000 Source: Bureau of Labor Statistics. January

29 Educational Attainment of Persons Aged 25 Years & Older: High School & Higher Tennessee: 86.0% United States: 87.0% Source: U.S. Census Bureau, American Community Survey (5-Year Estimates ). Less than 75.0% 75.0% to 79.9% 80.0% to 86.0% Greater than 86.0% January

30 Tennessee s 2016 Per Capita Personal Income tends to be higher when educational attainment is higher Source: Bureau of Economic Analysis. January

31 Tennessee Forecast Summary Real GDP growth at 2.7% Nonfarm job growth of 1.4% Unemployment rate at 3.6% Personal income growth of 4.3% January

32 12.0 Tennessee Fiscal Outlook: Mild Recession Cumulative Balance (bil $) FY19 FY20 FY21 FY22 FY23 FY24 Scenario #1 (Flat Expenditure Growth) Scenario #2 (Maintenance Expenditure Growth) Scenario #3 ( CAGR) January

33 12.0 Tennessee Fiscal Outlook: Severe Recession Cumulative Balance (bil $) FY19 FY20 FY21 FY22 FY23 FY24 Scenario #1 (Flat Expenditure Growth) Scenario #2 (Maintenance Expenditure Growth) Scenario #3 ( CAGR) January

Boyd Center for Business & Economic Research Haslam College of Business The University of Tennessee 716 Stokely Management Center 916 Volunteer Boulevard

34 Boyd Center for Business & Economic Research Haslam College of Business The University of Tennessee 716 Stokely Management Center 916 Volunteer Boulevard Knoxville, Tennessee phone: fax: Follow January

Economic and Fiscal Update

Economic and Fiscal Update OCTOBER 2012 Donald J. Bruce, Professor Center for Business and Economic Research The University of Tennessee, Knoxville 88Q2 89Q2 90Q2 91Q2 92Q2 93Q2 94Q2 95Q2 96Q2 97Q2 98Q2