Economic Trends

Economic OutlookJones College of BusinessSeptember 21, 2012David A. Penn, DirectorBusiness and Economic Research CenterJones College of BusinessMiddle Tennessee State Universitydpenn@mtsu.edu

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Snapshot for Nashville MSAJobs: still growing, but much more slowlyUnemployment rate: down, then upManufacturing: doing nicely, thank youHousing: much, much betterGovernment jobs: still a dragTaxable sales: off to the races

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Nashville MSA at a Glance (July 2012)3 IndicatorsYear AgoThis MonthYear to Year % Change Total Nonfarm Employment (thousand)755.8762.30.9 Labor Force (thousand)841.5834.9-0.8 Unemployed (thousand)67.860.8-10.4 Unemployment Rate (percent)8.17.3-0.8 State Sales Tax Collections (million $) 138.2 150.6 8.9 Single Family Unit Housing Permits30946650.8 Total Housing Permits35150042.53

Tennessee at a Glance (July 2012)4 IndicatorsYear AgoThis MonthYear to Year % Change Total Nonfarm Employment (thousand) 2,656.7 2,689.6 1.2 Labor Force (thousand) 3,127.7 3,108.1 -0.6 Unemployed (thousand) 292.7 262.1 -10.5 Unemployment Rate (percent)9.48.4-1.0 State Sales Tax Collections (million $) 562.6 580.9 3.2 Single Family Unit Housing Permits 819 1,084 32.4 Total Housing Permits 919 1,170 27.34Nonfarm job growth Nashville MSA5

Job growth slowing, down to 0.9% over the yearPrivate sector job growth , while not robust, has not been as weak as one might suspect from all the hand-wringing over job growth. Tennessee private sector growth has increased by more than 30,000 over the year, gaining 1.4%. Total nonfarm employment, the figure that makes the headlines, has gained just 17,500 over the year, 0.7%.

Downsizing by local government is primarily responsible for the very slow growth of nonfarm jobs in the past few months. Local governments are adjusting to a budgets without Federal stimulus revenues; in the absence of growing local revenues, they have been force to cut back very significantly. Since January, local government employment has shed 7,700 jobs, a drop of 2.7% in just six months. Had local government been able to continue to preserve payrolls, private sector growth would have improved due to the ripple effect.

5Job Gains and Losses Nashville MSA (2nd quarter over the year)6SectorJob growth (thousand)Growth RateTotal Nonfarm10.21.4%Professional and Business Services7.16.8%Leisure and Hospitality2.32.9%Durable Goods Manufacturing2.04.8%Retail Trade1.51.8%Other Services1.23.7%Financial Activities0.40.8%Information-0.1-0.4%Mining, Logging, and Construction-0.2-0.6%Non-Durable Goods Manufacturing-0.3-1.3%Transportation and Utilities-0.3-1.1%Education and Health Services-0.6-0.5%Wholesale Trade-0.7-1.9%Government-2.0-2.0%Job Gains and Losses Tennessee (2nd quarter over the year)7SectorJob growth (thousand)Growth RateTotal nonfarm39.11.5%Durable Goods Manufacturing11.56.3%Government10.52.5%Education and Health Services7.31.9%Professional and Business Services6.62.1%Mining, Logging, and Construction5.95.4%Leisure and Hospitality3.41.3%Retail Trade1.50.5%Other Services0.30.3%Information0.20.5%Transportation and Utilities-0.6-0.4%Financial Activities-1.2-0.9%Non-Durable Goods Manufacturing-1.9-1.6%Wholesale Trade-4.4-3.7%Nashville SectorsConstruction: job growth cooling offManufacturing: still a leaderFinancial activities: breaking even (finally)Wholesale trade and Education and Health care: losing ground; problem because of sizeGovernment: will downsizing cease?

8Construction jobsCooling this yearDrop in commercial constructionJobs for housing construction not apparent yet

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ManufacturingGains coming out of the recessionUp 4,000 since 2010Flat in 201210

Manufacturing: new locationsAutomakers earn dollars for sales, but must pay for labor and supplies in yenAnd they are getting fewer yen per dollar in the foreign exchange markets

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Solution: build more plants in the U.S.Nissan-Smyrna will benefit greatly

11More cause for concern12Negative job growth for this important sectorFewer education jobs and possibly job losses in hospitals

Unemployment rate13

Low of 6.4% in March.Presently at 7.3%.Why is the Nashville unemployment rate climbing?Labor force Nashville MSA14July drop in employmentJob seekers up sharply since March

Initial claims15

Claims rising following improvement in 2011Higher claims caused by increased layoffsLevel of claims remains low

15Underutilization TennesseeThe official unemployment rate understates labor force utilizationMeasures of underutilizationOfficial unemployment rate: 8.5%U6 rate of underutilization: 13.8%, including working part-time for economic reasons

16There is a lot of pain out there that is not measured by the official unemployment rate.

The U6 measure includes total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all marginally attached workers. Marginally attached: want to work, have looked for work in the past 12 months, but not in the past 4 weeks. Not counted as unemployed.

The U.S. rate is 16.3%. Tennessee ranks 16th highest in 2001Q2. the highest rates are in Nevada 23.3% and California 21.8%, while North Dakota has the lowest 7.2%.

16Why the slowdown?Problems in the euro zoneEuropean recession reduces demand for Tennessee manufactured goodsQuick turnaround unlikelyUncertainty regarding fiscal policyPublic budget cutbacks

17Congress; what will be the source of spending?17State Sales Tax Collections Nashville MSA18

Collections exceed the pre-recession levelPurchasing power lags; still 6.8% lowerState sales tax revenue continues to climb in the Nashville MSA. Rising sales tax collections means rising sales for a whole range of items, suggesting income increases and moderately improving confidence for consumers. Collections for August (business done in July) were $138.7 million, up from a low of $125 million two years ago. Over the two year interval, collections have grown by 5.3% a year.

The previous peak, not shown in the graph, was $146.5 million for the average month of 2007. The present level is 5.4% lower than the peak. So, if the present rate of growth holds, collections should return to the level of 2007 in a little more than twelve months.

By comparison, sales tax collections for Tennessee are growing somewhat more slowly, by 4.2% per annum during the past two years.

18Sales Growth in Tennessee19Growth of Sales Taxable Spending2011-2012 2nd QuarterCategorySpending GrowthBuilding materials15.7%General merchandise6.7%Food stores3.8%Auto dealers8.2%Apparel6.9%Furniture and home furnishings-0.7%Eating and drinking6.3%Misc.2.7%Total Retail5.3%19Housing: much, much betterHousing prices level, rising some locations Construction activity growing quicklyHome sales rising fastForeclosures moderatingMortgages in distress fallingRenewed in-migration is needed to sustain new construction

20Housing price growth21HPI growth positive for 2012.2First time since 2008

We use housing price index, or HPI, data provided by the Federal Housing Finance Agency. 21Housing price growth (zoom in)22HPI growth positive for 2012.2

We use housing price index, or HPI, data provided by the Federal Housing Finance Agency. 22Housing price growth (2012.2)23Source: housing price index www.fhfa.gov

Tennessee foreclosures24

Past due mortgages improvingNew foreclosures fluctuating around 0.95 percentData: Mortgage Bankers AssociationAgain, a long way to go. Current past due has return to the early recession level of 10%, down from the peak of 10.8% but still far above the pre-recession level. What is the long-term average: 6.4% for mortgages past due and 0.36% for foreclosure starts.

High foreclosure starts suggests a rising number of foreclosures, adding additional supply to an already weak housing market.

Compare to U.S. average and state ranking.

24Home sales Nashville Area25

Up 27% from last AugustStill far to go

Longer perspective

Home inventory Nashville Area26Inventory is falling fast this year

Supply of homes low compared with demand 5.5 month supply on hand

Housing construction Nashville MSA27

Single-family 41% higher over the yearNashville construction is drifting very gently higher. The bump in 2009-2010 is due to the effect of the home buyers tax credit. Not much momentum is evident in the construction numbers. One would expect gently rising to flat over the next 12 months, unless confidence returns and employment growth picks up.

How low are the current figures? 27Single-family construction (May-July)28

85% of Nashville MSA growth occurred in these four counties

Housing construction Tennessee29

Slowing down?30

Slowing down?31

Slowing down?32

Slowing down?33

Slowing down?34

Slowing down?35IndicatorDirectionInitial claimsRisingNonfarm employmentSlowingUnemployment rateRisingHousing constructionSlowingSales tax collectionsSlowingPicking up steam36

Picking up steam37

Picking up steam38

Picking up steam39

Expectations for Nashville MSA*Nonfarm employment: slower growthSales tax collections: rising more slowlyHousing construction: mildly risingUnemployment rate: drifting lowerNashville growth predicated on moderate growth for the U.S. economy40*Assuming fiscal cliff is fixedEconomy stepping on the breaks?41

Fiscal CliffAre we stuck? How long will the bus be stuck on the embankment? Until something moves it. So with the economy.411941John Doe threatens to jump off city hall to protest high unemployment1941 unemployment rate: 10.9%

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PlayersJohn Doe43

ReporterBad guyWill he jump?44

Will John Economy tumble off the fiscal cliff?45

Are we stuck? How long will the bus be stuck on the embankment? Until something moves it. So with the economy.45Will John Economy tumble off the fiscal cliff?46You are here

Fiscal CliffAre we stuck? How long will the bus be stuck on the embankment? Until something moves it. So with the economy.46Fiscal Cliff Impact: Congressional Budget OfficeReal GDP will likely be 0.5% lower 2013.4 over the yearUnemployment rate will rise to 9.1% from 8.2%47Expectations for Nashville MSA with full Fiscal Cliff impactsNonfarm employment: shrinkingSales tax collections: fallingHousing construction: flat to fallingUnemployment rate: sharply rising48BERC Estimates: Fiscal Cliff ImpactExpected unemployment rates fourth quarter 2013:Tennessee: 9.3% (8.4% July 2012)Nashville MSA: 8.5% (7.3% July 2012)Return to the present unemployment rate will likely not occur before mid-201449Tracking Tennessees Economic Recovery50Statewide and all 10 MSAs.EmploymentUnemploymentHousing constructionHousing pricesTaxable salesCounty data

www.mtsu.edu/berc Tracking Tennessees Economic RecoveryTennessee Housing Market Report51Quarterly report on construction, sales, prices.

51Studies52Affordable housingInternational trade and green jobsAPSU economic impact analysisSouthwest Development District Impact of non-profitsImpact of new natural gas pipeline to Atlanta