EconSouth (Fourth Quarter 2005)
EconSouth (Fourth Quarter 2005)
Tennessee Outlook Is Positive Despite Sluggish Employment
If one looked solely at employment growth in Tennessee, the economic picture would be rather grim. Employment in the state has not returned to prerecession levels and grew by just over half a percent during 2005. Lack of growth in the state’s manufacturing sector and subpar performance in several service industries are major contributors to this sluggish growth. Overall employment momentum in the state is weak going into 2006 although a few industries, including retail, leisure and hospitality, and health services, are experiencing moderate growth (see the chart).
Some other economic indicators, though, paint a more positive picture of Tennessee’s economy. For example, state tax collections expanded more than 10 percent during 2005. In addition, real per capita income continued to grow more strongly than employment and at a pace similar to the nation’s, and initial claims for unemployment insurance were at historically low levels. Thus, Tennessee’s outlook for 2006, while still modest, is positive despite the state’s sluggish employment growth.
Real estate and construction have solid prospects
Housing markets in Tennessee were strong during 2005. Existing home sales surpassed 2004’s record levels although the pace of sales—aproximately 11 percent for the third quarter—was lower than a year earlier. Construction activity was also at a high level, and permit data indicate that single-family home building remained relatively strong during 2005. Housing markets should continue to ease in 2006, however, because of higher mortgage interest rates and the relatively slow pace of employment growth.
Nashville’s office and industrial markets improved during 2005. The city’s office vacancy rate declined from an estimated 13 percent to 9 percent, making Nashville one of the tightest office markets in the Southeast. Similarly, the vacancy rate for industrial space declined from 14 to 10 percent. Analysts expect this trend to stimulate commercial construction in 2006, but new construction could be hampered by higher input costs and shortages of materials.
Services and tourism expect slower job growth
The state’s service sector employment grew only modestly overall in 2005, and several industries were weak. For instance, the information technology sector continued to shed jobs at around a 3 percent annual pace, continuing the trend begun in 2001. Professional and business services employment declined slightly in 2005, pulled down by slumps in both the employment service component as well as in professional, scientific, and technical services.
|Tennessee’s housing market was strong in 2005, both for existing homes and new construction. Sales of existing homes in 2005 surpassed the previous year’s record levels.|
More positively, the state’s health services industry increased payrolls by just over 2 percent for the year, an increase similar to the industry’s growth nationwide. Also, Tennessee tourist attractions such as Rock City and Dollywood continued to be popular destinations during 2005, and employment in the entertainment industry expanded healthily. Tourism will remain an important source of growth for the state in 2006.
Manufacturing faces mixed performance
Tennessee’s manufacturing employment was little changed in 2005. In durable goods industries, manufacturers of motor vehicle parts added moderately to employment rolls. While Nissan’s decision to move its North American corporate headquarters to Tennessee is a positive factor, the subsequent decision by General Motors to reduce production at its Spring Hill Saturn plant by the end of 2006 clouds the outlook for the state’s important automobile industry. Wood products manufacturers added jobs during 2005 to meet residential construction demands and, along with household appliance producers, are likely to benefit from hurricane rebuilding activity along the Gulf Coast in 2006.
Nondurable employment continued to shrink during 2005, especially in the textile and apparel industries, where employment is down approximately 3 percent and 8 percent, respectively, for the year. The chemical-producing industry also continued to downsize. These trends are likely to continue into 2006 in the face of strong foreign competition.
David Avery, Michael Chriszt, Sarah Dougherty, Whitney Mancuso, Melinda Pitts, John Robertson, Navnita Sarma, and Gustavo Uceda of the Atlanta Fed research department’s regional research group contributed to the states articles. The Atlanta Fed’s supervision and regulation department also contributed. Unless otherwise specified, annual employment growth is for November 2004–November 2005.