Regional Update (October-December 1996)

Index Southeastern economic indicators

Cover Story - Southeast to Keep Pace with the Nation in 1997

Alabama is Poised for Improvement

Florida's Pace to Slow but Remain Strong

A Slower but Positive Pace in Store for Georiga

Resource Base Likely to Work in Louisiana's Favor

Mississippi Set to Emerge from Its Post-Boom Hangover

A Good but Unspectacular Year Ahead for Tennessee

A Good but Unspectacular Year
Ahead for Tennessee

Tennessee encountered various labor constraints this year, which generally held job growth rates down to about regional averages. While scattered local labor shortages may seem to indicate relative economic strength, on a large scale these shortages are not healthy. Middle Tennessee, for example, was enjoying job growth rates of two to three times the national average. Now the Nashville area is experiencing below national average growth rates, largely because of the labor shortage.

The current slowdown does not, however, bode ill for the coming year. While gross job creation may only keep up with national averages, in the face of tight labor markets this is not bad performance. Moreover, personal income will continue to grow at very robust rates. A healthy service sector, powered by strong tourism, combined with losses in low-wage apparel jobs offset by a rise in higher paying auto-related manufacturing jobs, points toward a good, albeit not spectacular, 1997.

Manufacturing outlook mixed

anufacturing employment in Tennessee shrank by 2.5 percent from the third quarter of 1995 through the third quarter of 1996. As in other southeastern states, most of the weakness was registered in the apparel industry, which decreased by 15 percent over the year. Other nondurable industries also posted job losses or had virtually no employment gains. For example, printing and publishing employment was flat, reflecting a lack of growth in the music and religious publishing industry in the Nashville area.

Although overall durable goods employment was little changed over the year, employment in the largest durables sector, transportation equipment, was up by 3.9 percent. Nissan announced the hiring of about 200 workers for a new plant in Dechard, near Nashville. Saturn is also expanding its employment rolls, which should help to ensure a positive outlook for the industry next year and beyond.

Other durables industries, such as industrial machinery (which has been stimulated by new plant construction around the state), maintained relatively high employment rolls during the last two years. The lumber and wood industry also added employees, due largely to increased construction, though stabilization is expected in the coming year, as the national market slows.

For 1997, weakness in apparel is likely to continue, and there appears to be no catalyst to jump-start the sluggish printing and publishing industry. The transportation equipment industry will continue to be bolstered by new suppliers and plants locating in the area but may leave the state vulnerable to downturns in the cyclical auto industry. The lumber and wood and furniture industries will be heavily dependent on the nationally slowing residential building industry.

The industrial outlook was recently bolstered by the capital investment numbers from the Tennessee Department of Economic and Community Development for 1996. During the first half of this year, the state saw $1.4 billion in new and expanded business ventures, up 49 percent from year-ago figures.

The state's export industry is dominated by chemical and paper products bound for Europe and Japan and transportation equipment and industrial machinery and computers going to Canada and Mexico. Shipments of Saturn models to Europe and Japan, and auto parts to most markets, should add visibility to other state industries in the new year, and thus potentially more jobs.

Services set to continue on upward path

Tennessee continued to post moderate employment growth in services during 1996 with nearly a 3 percent gain from the third quarter of 1995 through the third quarter of 1996. With one out of four Tennesseeans employed in service industries, their health is vital to the performance of the state economy as a whole.

In 1996 hotels and lodging establishments and the amusement and recreation industries grew by 7.6 percent and 3.4 percent, respectively. Employment in health services also rebounded somewhat, growing by 1.5 percent following a period of consolidation. These growth paths look likely to continue in 1997, as state population and employment continue to expand.

Tourism: Nashville likely to be the focal point

Tourist attractions in those parts of the state away from Tennessee's Olympic venues were adversely affected this year as consumers chose to spend their dollars on the Games. Hotel and motel bookings in Nashville and Chattanooga were well below pre-Olympic expectations. At the Opryland U.S.A. theme park, heavy discounting and promotion was required to boost traffic.

In the wake of the Olympics, east Tennessee is trying to cash in on its white water rafting exposure. Success, however, depends on cooperation among the federal government, the Tennessee Valley Authority, and the state to regulate water flow and use of federal lands.

The approval of an $80 million bond referendum to partially finance the building of a stadium in Nashville for the former Houston Oilers professional football team assures that the city will finally be put on the "pro sports map." Even if the deal proves costly, Nashville will reap the recognition that goes with having an NFL team.

The pro-football "prestige effect" should be positive, not only in stimulating business development in the area but also as a tool to attract new business. In addition, following the expansion of Opryland, Nashville is adding a new convention center that should add to the city's appeal as a location for business meetings.

Retail growth set to moderate

Overall, retail growth rates in 1996 outpaced the nation's, even though growth slowed through the year. Durable sales growth was stronger than in 1995, with automotive sales dominating and registering extremely high growth rates. However, home-related product sales growth stalled in the second and third quarters. Similarly, nondurables sales growth got off to a good start and then weakened to a minimal rate of growth. During 1997 overall retail sales growth will be moderate as durable sales slow and income increases remain restrained.

Construction likely to remain healthy in 1997

Single-family home construction activity continued to improve during the first half of 1996 but fell short in the third quarter, when permits for new homes fell to 15.5 percent below the year-ago level. Despite this fall off, activity within Tennessee remains at relatively strong levels.

Existing home sales were moderate this year, a sharp contrast to 1995's decline. Nashville and Knoxville permit growth followed the state trend, peaking in the second quarter and then dropping significantly in the third quarter. Construction in Tennessee should slow in 1997 but achieve moderate growth rates at generally healthy levels.

Multifamily permit growth in Tennessee was extremely strong this year, especially in the Nashville area. This trend is expected to continue in Nashville in 1997, relieving a five-year shortage of apartments. However, new construction is expected to precipitate a decrease in the occupancy rate and cause rent growth to slow. Despite this softening, local experts do not anticipate a strong overall decline in the market.

The commercial market continued to improve in 1996, as evidenced by falling vacancy rates around the state. The Nashville office market continues to experience tightening, accompanied by rising rental rates. As a result, more construction is anticipated in the coming year. In the Nashville industrial market occupancy levels remain high, and a large amount of construction is either under way or planned.

The future continues to look bright for the industrial market, with strong retail development during 1996 likely to continue into next year, and the market should experience moderate growth in 1997.

Overall 1997 looks good for construction for the state, especially as labor constraints ease and more workers continue to find employment in the sector.

Agriculture set for sluggish year

Despite expectations of higher yields, extension agents are describing this year's cotton crop as average. Cotton also lost acreage this year to relatively high-priced corn, and this trend will continue into next year.

Cattle and dairy farmers were negatively affected by the high feed costs of 1996, although there has been some recent moderation in grain prices. Increased grain production is expected to continue to help relieve some of the price pressure. However, feed costs are expected to remain at elevated levels into next year.