EconSouth (Fourth Quarter 2006)

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Volume 8, Number 4
Fourth Quarter 2006


Housing, Energy Loom Large in '07

Southeastern Economy to Grow Modestly in 2007

Global Outlook Generally Bright in '07

Carpeting on a Roll in Georgia


Fed @ Issue

Q & A

Research Notes & News

Southeastern Economic Indicators




Businesses, Services Boost Tennessee

Related Links
On this site:
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Tennessee Department of Community and Economic Development
Positive trends in economic data and optimistic anecdotal reports indicate that Tennessee's economy is on a reasonably solid footing going into 2007. Year-over-year employment expanded at a modest pace of just over 1 percent for most of 2006 (see the chart). However, as indicated in the sidebar on employment data revisions, those estimates of the state's employment numbers will likely be revised higher, at least for the first three months of 2006.

Employment rose most evidently in the construction, leisure and hospitality, health care, and professional business services industries, but the manufacturing sector remained weak overall.

State Profiles

Real per capita income was up by over 2 percent in the first half of 2006. This solid income growth is reflected in state tax revenue; nominal sales tax collections increased by 6 percent through October, similar to the 2005 increase.

More businesses call Tennessee home
One source of strength for the state has been its ability to attract new businesses. Expansion magazine ranks Nashville, Knoxville, and Memphis among the top 10 hottest cities in the United States for business relocation. Nashville, in particular, has become a significant corporate headquarters city. Following the lead of firms that relocated to the area in recent years, such as Caremark Inc., the pharmaceutical services company, and Asurion, a service provider for the wireless communications industry, several other companies are in the process of relocating their headquarters to the state.

In Nashville, the highest-profile relocation is Nissan North America, which plans to bring some 1,200 jobs to the city. Other firms that have also followed the trend include, Texas Home Health, and Olhausen Billiards. These relocations, together with Nashville's strength as a business travel and convention destination, have resulted in the area's employment growing at more than twice the rate of the state overall.

The Knoxville area has also experienced new business growth. For instance, access to the Tennessee Valley system of lakes and waterways, along with inland protection from hurricanes, has helped make the area a hub for the boat building industry. Local boat builders include Mastercraft Boats, Tennessee Watercraft, and the Brunswick Boat Group, which recently moved its corporate headquarters from Chicago to Knoxville and also operates two plants in the area.

Tennessee corporate office building
A thriving business climate, headlined by some high-profile corporate relocations to the state, has created a firm foundation for economic growth in Tennessee heading into 2007.

Eastern Tennessee's place in the boat building industry has been bolstered by the addition of two more companies, Washington-based Christensen Yachts and Kansas-based Cobalt Yachts. Cobalt Yachts, which has already begun limited production, plans to be at full production with more than 350 employees producing 200 yachts per year by 2010. Upon completion of its production facilities in 2008, Christensen Yachts will employ 500 people to produce its new line of luxury mega-yachts. The company expects the number of employees to double within six years as production increases.

Real estate holds firm
Although Tennessee's housing markets experienced some moderation in 2006, the state appears to be at little risk of a major housing market downturn. The declines in home sales in Nashville and Knoxville during the second half of 2006 have been milder than those experienced nationally. In addition, Nashville real estate agents reported that prices for new and existing homes remained relatively firm. The reduction in construction has been relatively mild as a result. For instance, the number of single-family building permits fell only 2 percent year-to-date in 2006, compared with a 14 percent drop nationally. Also, increased demand for second homes away from coastal areas may help support housing activity in the Southern Highlands region of the state in 2007.

The pace of nonresidential construction activity was also quite steady during 2006. Businesses relocating to the state have continued to keep office and industrial occupancy rates high, leading to some increase in construction activity. Commercial development should continue its steady pace in the coming year, while vacancy rates will remain at relatively low levels as the state's major metropolitan markets continue to attract new businesses.

Employment Growth in Tennessee, 1997–2006
Tennessee employment growth chart
Source: Bureau of Labor Statistics

Services, tourism enjoy growth
Tennessee's service industries increased employment by about 1.6 percent in 2006. This growth was supported by the continued strength of the leisure and hospitality industry, which accounted for about 10 percent of the state's workforce in 2006. Expansions at popular attractions such as Dollywood added to the numbers, as did increased hotel occupancy rates in the Nashville area. Given the current trends, the leisure and hospitality industry should remain a bright spot in Tennessee's economy in 2007.

Health care industries, which account for 11 percent of the state's workforce, also maintained solid growth during 2006, and that trend should continue into 2007. In addition, corporate relocations and expansions create a positive outlook for the professional and business service sector in the coming year.

Dell Computers, Comcast Corp., and Verizon Wireless, for example, have all announced plans to relocate or expand their customer service centers in the Nashville area. Dell plans to add 1,000 jobs to the area while Comcast and Verizon will add more than 400 and 200 new jobs, respectively, within the next year.

Manufacturing shows moderation
Tennessee has experienced moderately declining employment in the manufacturing sector since 2001, and that trend is likely to continue into 2007. The transportation equipment industry experienced net job losses in 2006 attributable, in part, to reduced production at Saturn's Spring Hill plant and weaker demand for heavy truck equipment. Textile, apparel, and furniture producers continued the pattern of employment losses as firms shuttered operations or relocated overseas to take advantage of lower-cost labor. Also, the printing industry, a significant business in Tennessee, continued to lose market share to electronic media, and some of the state's printing companies downsized as a result.

The slowing residential U.S. housing market will likely have an adverse near-term impact on furniture and wood products manufacturers, while the state's textile and apparel industries will continue to struggle against foreign competition. Plans to upgrade the Saturn plant in 2007 will result in the temporary idling of around 2,000 workers for several months. However, the upgrade is part of the preparation for future vehicle production and provides some reassurance about the plant's longer-term viability.

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, the data are through the third quarter of 2006.