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A rougher landing for the Tennessee Valley economy in 1990.

The Tennessee Valley economy slowed considerably in 1989, and the "soft landing"-moderate expansion with no recession and no increase in inflation-expected in the national economy in 1990 will mean even slower growth in regional output and employment. Though both regional and national manufacturing product will see slow growth, manufacturing employment in both the region and the nation will, at best, see no growth in 1990 and, more likely, a small decline.

The poor performance of manufacturing will present more of a problem for the Valley than for the nation, since the expansion of the manufacturing sector in the last few years has set the pace for overall regional economic growth. Manufacturing encompasses a larger proportion of employment in the valley than in the nation, and a decline will more adversely affect the growth in other sectors. With growth in commercial employment in the region closely tied to regional manufacturing, the Valley economy will be more affected by the change of pace in nation's growth from fast in recent years to very slow in 1990.


The latest reports on national economic growth show that we are still on track for the desired soft landing, with inflation appearing to be less of a threat as annual GNP growth slows around 2.5 percent. These ports have assuaged the fear that the national economy might slip into a recesion, which is indeed good news for the Valley. Recesions in the early eighties coupled with a strong dollar left the Valley with unemployment rates well above U.S. levels through 1985, especially in rural areas. In the expected soft landing, however, manufacturing is not expected to fare well, and is is not good news for the Valley, for it has been manufacturing that has led the way to fast regional growth in recent years.

The surge in demand for U.S. exports over the last few years and a related surge in capital spending provided the stimulus needed for the region's manufacturing sector to outperform the national average. In the Valley, economic strength in manufacturing has translated into stronger growth in the commercial sector. The Valley's dependence on manufacturing employment, however, will in turn make the landing of the regional economy much rougher than would otherwise be expected, since weakness in manufacturing is a drag on the growth of the commercial sector. In a period of decline in regional manufacturing employment, the regional commercial sector can be expected to slow more than the national average.


Since manufacturing constitutes a larger proportion of total employment in the Valley than in the nation, a decline in Valley manufacturing employment will slow the growth in our other sectors more than will be the case for the national economy. This is due to the regional services sector being underdeveloped relative to other regions of the U.S., especially in rural areas where manufacturing can comprise as much as 40 percent of total employment. Outside of the largest regional metropolitan areas, the region does not generally provide producer and business services independently of the income from local manufacturing. As in other regions, growth in the Valley commercial sector will still compensate for the slower growth in manufacturing employment, but not to the extent of the national services sector.

The effect of manufacturing on the outlook for the Valley economy can be seen in Figures 1, 2, and 3 [omitted]. Figure 1 [omitted] shows that regional manufacturing employment grew at an average annual rate of 3.1 percent in 1987 and 1988, which was twice the annual average rate of the national sector. The unexpected surge in demand for U.S. exports over the last few years and a related surge in capital spending provided the stimulus needed to bring the regional economy back in line with national levels of economic growth. The more favorable effects of these developments on regional manufacturing employment appear to have continued into 1989, even though the growth in both the regional and national sectors has slowed considerably.

The significance of the forecasted slight decline in regional manufacturing employment in 1990 for the rest of the Valley economy can be seen in Figures 2 and 3 [omitted] . In 1987 and 1988, years of exceptional growth in manufacturing employment, the Valley posted a 4.3 percent average annual increase in commercial employment, as well as total employment growth above the U.S. average. This pattern of across-the-board employment growth higher than the national average is forecast to end abruptly in 1990, even though the slowdown in regional manufacturing is no worse than that expected in the national economy. As Figure 3 [omitted] shows, the effect of a slowdown in manufacturing traced through the regional commercial sector is expected to culminate in total employment growth of only 0.6 percent in 1990, somewhat below that expected in the nation.


The pattern of growth among regional industries in the soft landing will be similar to that observed in a recession, except growth will remain positive. Interest-sensitive industries such as construction will see employment declines in 1990. Regional manufacturing industries related to construction and capital equipment will also see employment declines. The region's lumber, stone, and carpet industries will be affected by the decline in construction activity. Employment in the manufacture of fabricated metals and machinery will similarly suffer from the expected drop in demand for capital equipment in 1990.

Regional transportation equipment manufacturing will do better than its national counterpart. The production of automobiles is a relatively new industry in the Valley, and the commitments of GM's Saturn plant and the Nissan plant near Nashville can be expected to boost Valley manufacturing employment, despite a poor performance by this industry in the nation. Also, although defense related activity will slow from its previous fast pace, this will remain a source of strength for the Valley.

As with the Valley's manufacturing industries, the slowdown will not affect the Valley's commercial sectors uniformly. Over four-fifths of commercial employment in the Valley is in the trade and services sectors, and both are expected to grow more slowly in the Valley than in the nation. The remaining commercial employment is equally split between the two groupings of financial, insurance, and real estate services (FIRE) and transportation, communications, and public utilities (TCPU). The FIRE sector is expected to post the weakest employment growth in the soft landing, while employment growth in the TCPU sector is expected to remain stronger. This pattern corresponds to recent studies showing localized development of distribution and business services in the Valley's largest metropolitan areas, namely Memphis and Nashville, while commercial development in other areas remains tied to local manufacturing. SUMMING IT UP

For the Valley economy a soft landing means that total employment will continue to increase as the commercial sector continues to create more jobs. The potential for service sector job growth, however, will be seriously limited by the effects of the slowdown on regional manufacturing. Slower regional growth in both the manufacturing and commercial sectors will mean slower overall employment growth, with the Valley economy performing worse than the national average in 1990. Compared to the past few years of exceptional growth, the Valley economy should prepare for a brief pause in the regional expansion before returning to faster-than-national growth.

Mr. Gonzalez is manager of economic forecasting, and Mr. Springer is economist for the Valley Resource Center, Tennessee Valley Authority.
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Author:Gonzalez, Juan E.; Springer, R.A.
Publication:Business Perspectives
Date:Dec 22, 1989
Previous Article:1990: a downward trend in economic activity.
Next Article:Regulatory and legal issues brewing in the banking industry.

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