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1990: a downward trend in economic activity.

The economy's performance during 1989 and the forecasts for 1990 reflect a downward trend in economic activity. The degree of the slowdown in growth, however, is still unknown.

The outlook for 1990 indicates a soft landing. According to the January issue of Blue Chip Economic Indicators, the nation's Real Gross National Product is projected to increase by 1.7 percent in 1990. Inflation is expected to hover around its current level of 4.2 percent, while unemployment will hold steady at 5.6 percent. Forecasters anticipate that consumers will increase their spending approximately 2.2 percent, and corporate pretax profits will decline by 1.9 percent. Since the release of the 0.5 percent growth estimate during fourth quarter 1989, firms have continued to revise their 1990 earnings downward.

The performance of the national economy, as usual, will largely depend upon the Federal Reserve's desire and ability to maintain a non-in-flationary and non-recessionary policy. Last summer, the Federal Reserve began lowering interest rates in an attempt to slow the rate of decline in economic activity. Recently, the Fed has indicated that further declines in interest rates are not likely so long as inflation remains at its current level.

The Memphis economy started 1989 on solid ground; but as the growth in employment and spending levels slowed, the year-end performance of the economy reflected below-trend growth. The local economy will continue to be influenced by the lack of momentum in the national economy in 1990.

Economic activity in Memphis is expected to slow during the early part of 1990. The diversity in the employment mix and less dependence upon manufacturing in the local area should provide some protection from the national slowdown expected in the first two quarters of 1990. The Memphis economy has historically had less severe economic downturns than the national economy. The severity of the 1990 slowdown will largely depend upon the resiliency of the construction and manufacturing sectors and the confidence levels of Memphis consumers and businessmen.

The Memphis economy will face problems of corporate and consumer debt and full-employment constraints in 1990.

Discounting the effects of international and federal debt, corporate and consumer debt could have a great impact on the Memphis economy during this year. The more a company (consumer) relies upon borrowed money, the greater its sensitivity to an economic slowdown.

If Memphis consumers' incomes and business profits decline early in the year, their willingness to take on additional debt will be curtailed. Any prolonged slowdown in spending plans would aggravate an already slow rate of growth expected for this year.

The Memphis economy is entering the year with an historically low unemployment rate. Eight years of job growth and economic development has helped push Memphis into the national spotlight as an emerging southeastern metropolitan area. However, some evidence exists that future job growth may be limited by the absence of a readily available and trained workforce, leaving the prospect that labor-force constraints will restrict new and existing expansion plans.

Overall, the Memphis economy will most likely be characterized by slow growth during the first half of 1990 and stronger growth in the second half. Expectations of moderate inflation and slightly lower interest rates could help stabilize the local economy in the second half of the year. However, if continued weak consumption and employment constraints persist, the slowdown of the Memphis economy could continue into the second half of 1990. The forecast of a 0.5 to 1.5 percent growth rate for 1990 compared with the 1989 advance of 1.9 percent reflects the slow growth anticipated in the first half of the year and the possibility it could continue throughout 1990.

BUREAU FORECAST-THE NATIONAL ECONOMY: The national economy is projected to achieve growth of around 2.0 to 2.5 percent in 1990. The inflation outlook will remain favorable in the 4.5 to 5.5 percent range, approximating the yearly increase over the past two years. The current Federal Reserve response to inflationary pressures and rising international interest rates makes substantially lower interest rates in 1990 more unlikely. The anticipated range for short-term interest rates f or this year is between 7.0 to 8.5 percent.

BUREAU FORECAST-RETAIL SALES: Nationally, consumer confidence and corporate profit expectations are projected to remain below par. Poor corporate profits and capacity utilization should make business capital investments weak in the 1990 economy. Recent surveys by the Bureau of Business and Economic Research at Memphis State University, however, suggest that Memphis businessmen continue to be more optimistic about the outlook for the Memphis economy than the national economy. If Memphis consumers maintain their spending patterns in 1990, constant dollar retail sales are forecast to increase 2.3 percent in 1990 compared to a gain of 2.6 percent in 1989.

BUREAU FORECAST-EMPLOYMENT: While recent employment cutbacks announced by national corporations may be indicative of further cutbacks to come and may affect major employers in Tennessee and Memphis most Memphis employers will be facing a tight labor market and rising labor costs during the year.

Entering 1990, Memphis employers were less optimistic about hiring than they were a year ago. A recent Manpower, Inc., survey indicated that only 23.0 percent of Memphis employers expected to increase staffing levels compared with 33.0 percent this time last year. With the constraints of low unemployment and profits being squeezed (from labor costs rising faster than productivity gains), the outlook for employment growth in the Memphis economy will be less promising than in past years. Employment growth is projected to increase less than 1.0 percent-less than half the 2.5 percent rate recorded over the past two years. The stronger segments of the Memphis labor market-retail sales; services; and transportation, communications, and utilities-are expected to account for most of the employment growth in 1990. The Memphis unemployment rate is projected to rise during the year, but will remain between 5.0 to 6.0 percent.

Dr. Gnuschke is director of the Bureau of Business and Economic Research at Memphis State University. Mr. Alvarado and Mrs. Kemmsies are research associates at the Bureau.
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Title Annotation:includes related articles; Memphis, Tennessee economic forecast
Author:Gnuschke, John; Alvarado, Lew; Kemmsies, Kim
Publication:Business Perspectives
Date:Dec 22, 1989
Words:1015
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