Regional Update (October-December 1997)


Cover Story - Southeast to Mirror Nation's Overall Balance in 1998

Alabama to Reap Benefits of New Industry

Florida Continues to Drive Southeast Economy

Moderate Growth Pushes Georgia Past Post-Olympic Slowdown

Louisiana Economy Sends Mixed Signals

Some Bright Signs to Emerge for Mississippi

A Good but Not Great Year Ahead for Tennessee

Southeastern Economic Indicators

A Good but Not
Great Year Ahead
for Tennessee

T ennessee has been substituting relatively high-wage auto manufacturing jobs for relatively low-wage apparel jobs. The state's dependence on auto jobs could be a problem during weaker periods in the industry, but on balance this is a positive development. The migration of the auto industry into the state has brought sufficient new jobs to more than offset the sluggishness experienced by industries in long-term decline, and transportation manufacturing provided some strength on net for the economy in 1997.

Tennessee has also been facing some serious labor shortages for an extended period of time during this expansion. Given the tightness of local labor markets, the state has done quite well in maintaining reasonably balanced growth, but this situation clearly is a concern for future development and should hold growth below the nation's in 1998.

Manufacturing Outlook Mixed

Manufacturing employment in Tennessee continued to contract in 1997, declining by 1.5 percent from the third quarter of 1996 through the third quarter of 1997, more than the minor decline suffered by the other Sixth Federal Reserve District states and considerably below the nearly 0.5 percent growth seen nationally in manufacturing. About one in five Tennesseans work in the factory sector, which is weighted towards durable goods production. The state's largest durables category, the transportation equipment industry, added 2.2 percent to payrolls over the period mainly because of expansion in the vehicle production segment. Tennessee's manufacturing sector growth now hinges largely on the strength of the auto market and a few other major industries.

Saturn Corp. recently cut back production and overtime in response to slower sales. But Tennessee's auto parts manufacturers, which came to the state to be near the auto producers, are becoming an important part of the state's exporters. These auto parts manufacturers may continue to prop up the transportation equipment industry as the business cycle matures and domestic auto sales flag. Other important durable producers such as electrical equipment, industrial machinery, lumber and furniture posted moderate declines in employment over the period.

Echoing the previous year, most of Tennessee's factory job losses appeared in nondurables production. The apparel industry, for instance, posted job losses of 7.5 percent, or about half the total of the previous year. The state's large chemical industry also registered declining employment rolls, but printing and publishing picked up some momentum and added jobs. Textile producers with less import competition are doing well. Crescent Hosiery Mills, for example, is running near capacity to keep up with demand. Superior productivity, computer-aided response to customer demand, and limited import penetration are reportedly keys to the firm's success. The lumber and wood and furniture industries depend on the residential building environment for the nation as a whole, and the outlook for 1998 is for slower growth or decline.

Influence of Trade Expands

Trade is growing in importance in the state economy. Exports' share of gross state product rose to 7.1 percent in 1996 from 5.8 in 1993. The outlook for 1998 is mixed. Exports of farm products and intermediate products like paper and chemicals have slowed recently, but manufactured exports, such as industrial machinery and computers, electrical and electronic equipment, and auto-related products have risen steadily.

Canada and Mexico are the leading export markets for Tennessee, accounting for more than one-third of the state's exports. In fact, shipments to Mexico and Canada jumped 40 percent and 31 percent, respectively, during the 1993-96 North American Free Trade Agreement implementation period. Auto parts, rubber products and other automotive-related exports lead the way in Tennessee's active trade with Mexico. Although auto-related exports are also important with Canada, Tennessee's exports to the United States' northern neighbor have a higher share of intermediate products like chemicals, paper and rubber, which have recently exhibited pronounced market volatility. While Tennessee's exports to Central and South America have steadily grown in recent years, sales to Japan, China and other Association of Southeast Asian Nations markets have been soft. The positive prospects for Mexican and Canadian growth bode well for Tennessee's export industries.

Good Year Expected for Services

Service employment growth slowed in Tennessee from 2.5 percent through the third quarter in 1996 to 1.5 percent through the third quarter of 1997. Job gains of 2.7 percent were posted in the state's business services sector while the hotel and lodging industry posted declining job rolls from a year ago. With nearly 30 percent of the state's service employment, health services added 1,900 people to employment rolls over the year. Health services are expected to continue to add to payrolls in the new year as the wave of mergers and consolidations subsides and the state's economy continues to grow. Amusement and recreation service employment growth increased to more than 7 percent. The hotel and lodging industry, together with amusement and recreation facilities, will continue to expand jobs unless slowing national economic activity puts a damper on business or pleasure travel to the state.

Employment Growth
Tennessee vs. Southeast and United States

Employment Growth Tennessee vs. Southeast and United States

Source: Calculated by the Federal Reserve Bank of Atlanta using data from Regional Financial Associates.

Tennessee's overall employment growth continues to be constrained by labor shortages, reflected in another year in which the rate of job growth fell below the region's and the nation's.

New shows at Dollywood in Pigeon Forge and at Nashville's Opryland U.S.A. and a new tourism campaign by Chattanooga's Convention and Visitors Bureau to promote the city and the Tennessee Aquarium are expected to continue to boost tourism. Olympic use of the Ocoee river, where the white-water competition was held, is also stimulating interest in the area. Nashville's Convention and Visitors Bureau is making a concerted effort to bring more foreign visitors to the Music City, where the newly expanded Opryland Hotel and Convention Center posted impressive occupancy numbers.

No Construction Records to Be Broken in 1998

Construction activity in Tennessee was healthy in 1997 despite a continued decline in single-family permits. Statewide, existing home sales also declined. With Tennessee's stable income growth, construction will maintain a pace in 1998 similar to that in 1997.

Multifamily construction growth slowed considerably during 1997. Managers in Nashville continue to offer concessions to keep their occupancy levels up and anticipate this trend will continue into the new year because of the large number of units still entering the market. As a result of lagging migration into the state, multifamily construction will likely continue to slow somewhat in the coming year.

Nonresidential construction in Tennessee declined in 1997 from the prior year even though the overall office vacancy rate in Nashville declined into the single digits. The Brentwood/Cool Springs office submarket has been surprisingly strong, with the lion's share of new construction. Pure speculative development has emerged in the Nashville office market. In 1998 the pace of office construction statewide is likely to slow somewhat, reflecting a catch-up in demand and a slowing of in-migration into the state.

More positively, the retail market in Tennessee experienced strong growth in 1997 as new retailers entered the state, and the outlook is good. The outlook for the industrial market is also positive, with this market remaining tight in middle Tennessee. Industrial occupancy rates keep moving up, and vacated space is leased quickly. Nonresidential construction continues to be dominated by the build-to-suit market, with much of the speculative construction preleased. Based on this, Tennessee will probably experience moderate nonresidential construction growth in 1998 on balance.

Agriculture Faces Some Uncertainty

With cash receipts of $310 million, cattle and calf is the largest agricultural sector in Tennessee. Outlook for this sector is directly related to the supply of feed corn. Domestic corn producers are expected to have larger production, but total stocks of corn should be smaller in 1997-98 than in the previous season. These smaller stocks could lead to greater price volatility, posing greater risks for cattle and calf farmers.

The total acreage of cotton harvested this year is expected to decline 6 percent from last year's levels. The yield is also predicted to decline by 1 percent to 605 pounds per acre. Total output will decline by 7 percent to 630,000 bales.

Tennessee Manufacturing Employment
vs. Total State Employment

Tennessee Manufacturing Employment vs. Total State Employment

Source: Calculated by the Federal Reserve Bank of Atlanta using data from Regional Financial Associates.

Manufacturing employment contracted again in Tennessee in 1997. Most of the job losses were in nondurables production.