Regional Update (October-December 1998)


Cover Story - Financial Crises Abroad Pose Many Uncertainties for Southeast in 1999

Economic Outlook for Alabama Varies by Region

Florida Growth to Slow but Remain Strong

Georgia's Strong Performance Continues to Move the State Forward

Louisiana Expands, but Lower Gas Prices Temper Growth

Although Gambling Boom Ends, Mississippi's Economy Is Stable

National Slowing Will Affect Tennessee's Growth Prospects

Southeastern Economic Indicators

National Slowing
Will Affect Tennessee's
Growth Prospects

T he outlook for Tennessee's economy is heavily dependent upon the course of the national economy. That dependence manifests itself in two rather different ways. First, the state's employment mix is quite diverse. Tennessee's industries depend heavily on consumer demand nationally. Heavy industry is important to Tennessee with the auto industry settling in, but so are a number of other industries — including primarily metals, chemicals, textiles, and printing and publishing. Entertainment and tourism have also become a significant part of the state's economy. All of these businesses move with changes in the national economy and so should decelerate in pace with U.S. economic growth.

At the same time, and somewhat paradoxically, Tennessee has been held back by the strength of the national economy, which has resulted in a serious shortage of workers available to relocate to the state. Tennessee was one of the first states to experience binding labor market constraints in the nation's current expansion. A national economic slowdown certainly would not be positive for the state, but it might help to ease some of Tennessee's labor market constraints, which started in late 1995.

Service Sector Remains Stable

Employment in service industries, such as health care, accounting and lodgings, accounts for about one of four nonfarm workers in Tennessee. Overall, the state's service employment growth slowed from 3.6 percent in the third quarter of 1997 to 1.8 percent through the third quarter of 1998. Business services posted job gains of 3.8 percent during 1998, slowing from over 7 percent gains in 1997.

Employment in health services, the state's largest service industry, representing 28 percent of all service employment, rose a modest 0.9 percent in 1998. Hotel and motel services employment, in contrast, rose over 8 percent as new and expanded hotels came on line, mostly in the Nashville area.

The 1999 outlook for Tennessee's services industries suggests more slowing as the national economy slows. Business services growth should weaken as general business activity slows, resulting in less demand for outside service providers such as temporary services. Few new projects are expected to stimulate hotel and motel employment, and health service employment will expand moderately because of stable demand and the industry's relatively limited recent growth.

Factory Outlook Mixed

Manufacturing employment in Tennessee contracted slightly from the third quarter of 1997 through the third quarter of 1998. Although factory jobs shrank somewhat in 1997, the decline was much steeper from 1995 to 1996, when the state lost over 20,000 factory jobs.

About 56 percent of Tennessee's factory employees work in production of durable goods, particularly transportation equipment, which includes motor vehicle and vehicle parts makers. These industries employ about 19 percent, or 53,000, of the state's durable goods workers. Growth in transportation equipment employment slowed in 1998 following a peak in 1997. Demand slipped for small cars, like those produced at the Nissan and Saturn plants near Nashville, as consumer tastes turned to larger autos, such as sport utility vehicles. This slowdown also adversely affected activity at some of Tennessee's many auto parts plants, which supply these assemblers.

Other important durable goods industries in the state include industrial machinery and electrical and electronic equipment. Both of these industries posted moderate growth in 1998.

Important nondurable industries include chemicals, apparel, and printing and publishing. The state's chemical industry employment declined moderately in 1998, but apparel employment plummeted 16 percent. Tennessee has lost about 20,000 apparel workers over the past three years. The state's printers and publishers reported little change in payrolls in 1998.

Tennessee's factory outlook is mixed in 1999. The apparel industry will continue to contract as the result of pressures from international competitors. A slowing national economy may retard demand for autos and auto parts produced in the state, adversely affecting transportation equipment employment and production. However, Nissan Motor Company plans a major restructuring at its Smyrna, Tenn., plant, which currently produces just the Sentra and Altima models. The company plans to move production of the Sentra to Mexico and move production of its Maxima sedan and a sport utility vehicle to the Smyrna plant.

International Situation Affects Trade

Exports' role in Tennessee's economy is growing. In 1997 exports accounted for 8.1 percent of gross state product and supported many factory jobs in key industry groups. Over half of the state's exports come from three industries: transportation equipment, chemicals, and industrial machinery and computers.

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

Factory job losses and flat performance in service sector employment held down Tennessee's overall employment growth in 1998.

Canada is the state's leading export market, receiving nearly one-third of Tennessee's exports, followed by Mexico and Japan, which receive another 16 percent of the state's shipments.

Weakening income growth in Japan and uncertainty about the yen/dollar relationship are reflected in Tennessee's recent sluggish growth in exports of industrial machinery and computers, chemicals and farm products to that country. Exports to Canada were also soft in 1997 and 1998 as shipments of chemicals and transportation equipment dropped, but these declines were more than compensated for by healthy gains in exports of textiles and advanced industrial products. Much of Tennessee's recent export expansion, however, came from strong demand for industrial products in Mexico and Latin America. The state's exports to this region rose sharply in 1997 and 1998, mostly because of increased exports of textile and apparel, computers, electronic products and transportation equipment. As a result, Tennessee's overall trade performance in 1999 will be determined in large part on the performance of Latin America, whose outlook remains uncertain.

Construction Shows Some Gains

After a downturn in 1997, new housing permit growth in Tennessee rebounded, turning positive in 1998. During the third quarter of 1998 the single-family permit growth rate was somewhat above the 1997 rate but considerably lower than the national rate. The Nashville market, however, experienced strong permit growth during 1998 while the Knoxville market continued to contract mildly. Existing home sales for the state continued to rise during 1998. In 1999 the pace of construction in Nashville should be similar to 1998's level and in line with demand.

Multifamily construction as measured by permit growth got off to a good start in early 1998 but stalled in the second quarter. Third quarter permits rebounded somewhat but not enough to make up for shortfalls experienced earlier in the year. Both Nashville and Knoxville experienced similar rebounds in the third quarter. In 1999 multifamily construction will continue to slow but remain at relatively healthy levels as pent-up demand, stemming from a labor-constrained construction slowdown during the last two years, is satisfied and additional demand remains at moderate levels.

Commercial construction growth as measured by square footage was very strong during the first quarter of 1998 compared to the previous year but slowed later in the year. Year-to-date growth, however, was strong, nearing that of the Southeast in the third quarter. During 1999 the commercial construction market will continue to slow along with the overall economy of the state.

Agriculture Hit by Drought
but Holds Steady

Cattle and calves represented Tennessee's number one agricultural commodity, with receipts totaling $413 million, in 1998. A drought and poor grazing conditions in many areas forced many farmers to flood the market with cattle for slaughter. This situation, together with record slaughter weights, created large beef supplies during the summer and early fall and sharply lowered cattle prices.

Soybeans are the state's second-largest agricultural commodity, with receipts totaling $275 million. This crop, too, was adversely affected by the drought but can more easily recover in 1999 if the weather is favorable.

Tennessee Manufacturing Employment
vs. Total State Employment


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

Although factory job losses were higher in 1995-96, employment in the manufacturing sector continued to contract in Tenessee in 1998, again performing below the overall employment growth rate for the state.