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Moderate growth continues for Tennessee Valley.

The U.S. recession which began in July 1990 has now been officially dated as ending in March 1991, with an up-and-down and very anemic national economic recovery proceeding since then. The Tennessee Valley has been outperforming the national economy over this period; for 1992, the Valley's unemployment rate was 6.7 percent as compared with 7.4 percent for the nation. However, the Valley's economy has been impacted by the national economic problems.

The Tennessee Valley region consists of all counties in Tennessee and several counties in Alabama, Georgia, Kentucky, Mississippi, North Carolina, and Virginia.

As the growth in national demand slackened in the second quarter of 1992, manufacturing employment in the Valley fell. It continued to fall in the third quarter before rising again, led by the pick-up in national demand in the second half of the year. Even with the mid-year decline, however, Valley manufacturing employment grew by 0.6 percent in 1992, while its U.S. counterpart declined by 1.4 percent.

Valley Manufacturing Leads Economy

The current economic performance of the Tennessee Valley is especially notable when compared to the 1982 recession. In 1982, the Valley had much higher unemployment rates than the nation (rates of over 12 percent compared to less than 10 percent for the nation), with rates remaining high in comparison to the U.S. well into the recovery.

It was the Valley's dependence on manufacturing that led to its poor performance in 1982, but it was also this dependence that led to its better-than-national performance during this cycle. Not only was manufacturing not as hard hit during this recession, but regional manufacturing has actually out-performed its national counterpart.

There are several reasons for the better regional-than-national manufacturing performance:

* The relatively low foreign exchange rate for the dollar has made regional manufactured goods more competitive versus foreign goods at home as well as abroad.

* Stable electric rates have contributed to the viability of Valley manufacturing industries.

* A greater proportion of manufacturing in the region is in nondurables, which traditionally perform better than durables over recessions.

* And finally, a major source of the region's better-than-national performance has been its durables manufacturing which has fared considerably better than its national counterpart.

The Valley is proportionately more affected than the U.S. by the value of the dollar due to the region's many industries that are vulnerable to foreign competition. These industries include some that are exporters, such as machineries, and considerably more that are vulnerable to competition from imports for the domestic market, such as textiles. While only 5.6 percent of the nation's total manufacturing employees worked in the fifty industries most vulnerable to foreign imports, almost two and one-half times that number (14.3 percent) were so employed in the Valley. The relatively low value of the dollar has improved the competitive position of these regional industries versus foreign production.

Besides the performance of import-vulnerable industries, what has been most noteworthy about Valley manufacturing over the current cycle has been the performance of regional durables. Durables have been a major point of weakness for the national economy but a point of relative strength for the Valley, as can be seen in Figure 1. In 1991, the nation's durables employment declined by almost twice the region's rate. In 1992, regional durables employment increased by 1.1 percent, while its national counterpart continued to decline (-2.5 percent).

Auto-related industries are a case in point. A large part of the U.S. decline in durables can be attributed to the slump in auto and related industries. However, the region is better positioned in these industries. Newer plant and investment, the relatively low dollar, and Japanese investment have all helped. For example, at a time of national layoffs and the transplanting of auto plants to Mexico and Asia, both the Saturn and Nissan plants in the Nashville area have expanded their facilities. This better regional performance is not limited to assembly plants; for example, Nippondenso, an electrical auto-parts supplier located just south of Knoxville, also expanded during this cycle.

Just as the performance of Valley manufacturing, especially durables, has helped the regional economy over the past two years, it will lead the Valley's continued growth as national demand improves. Even though the expected better regional durables performance can be seen in Figure 1, the Valley cannot significantly improve without a much stronger U.S. economy.

Sluggish Job Growth Still Hinders National Recovery

In spite of the recent encouraging national statistics, a strong U.S. recovery does not seem to be in the offing. National gross domestic product (GDP) rose at rates of 3.4 percent and 3.8 percent (preliminary) in the third and fourth quarters of 1992, respectively. This was the first time since 1989 that growth exceeded 3.0 percent. Nevertheless, growth remains considerably less than the usual 5.0 to 7.0 percent historical average rate for a recovery. Further, employment growth remains extremely sluggish, holding down income growth.

Indeed, a major problem with this recovery has been its lack of job growth. On average, 44.0 percent of the workers let go in previous recessions were recalled after business improved; during this cycle, only 15.0 percent expect recall. Layoffs have not been just a response to lower demand. Rather, they have also been caused by more basic long-term structural changes which U.S. firms are undergoing.

In order to prosper and even survive in the intense, world-wide competitive markets of today, U.S. businesses have been trying to keep their costs down, including their labor costs. These trends began long before the current recession. Manufacturing had already been restructuring since the early 1980s, leading to numerous layoffs. The commercial sector began experiencing the same type of competition-driven cost cutting as manufacturing towards the end of the last decade. In addition, problems with government budgets and cuts in defense spending have contributed to the poor job situation. Thus, many jobs that were lost during the recession have not been replaced, and layoffs are continuing.

With sluggish job growth, wage and income growth have also been slow. This has greatly contributed to the up-and-down nature of the recovery. Spurts in consumption led to increases in U.S. growth in the second quarter of 1991 and the first quarter of 1992, only to be followed by decelerating growth in subsequent quarters. Cautious businesses generally handled demand increases through increased hours rather than employment. Thus, employment and income growth were not sufficient to maintain the higher rates of consumption. However, it should be noted that momentum has been building in that each growth spurt reaches a new peak, and when the growth rates decelerate, they have not fallen to the levels of previous lows.

The faster growth at the end of 1992 is expected to slow in the first half of 1993 as sluggish employment and income growth rein in consumption. Already the consumer confidence index was essentially flat in January after rising sharply the previous two months. The lower level of tax returns this year as a result of the lower level of withholding last year will also put a damper on spending.

President Clinton is very likely to try to prevent a weakening of growth by implementing some kind of fiscal stimulus in 1993. Some form of investment tax credits and infrastructure expenditures are expected as an impetus to job growth. However, given the federal deficit, the stimulus is likely to be small and not inflationary.

With little threat of inflation and only moderate economic growth, the Federal Reserve (Fed) has little incentive to raise short-term interest rates. Further, given the make-up of President Clinton's chosen economic team, the administration is very likely to work with the Fed and follow through on addressing the deficit problem. Thus, only a small rise in the Fed funds rate is expected as the U.S. economy expands to reassure the financial markets that the Fed remains watchful against inflation.

These policies will help keep the economy's momentum going. Further, demand has now increased to levels that businesses cannot easily handle by increasing hours rather than employment. Thus, continued improvement in the job situation is expected in 1993, especially in the second half of the year, but not enough to set off a round of the strong growth usually seen in a recovery. Cautious businesses, financially tight consumers, and slow growth in Europe and Japan add up to only modest improvement in 1993. Although national total output and employment will increase more rapidly in 1993 than in 1992, the expansion will remain slow by historical standards.

Moderate Regional Economic Recovery Expected

As 1993 progresses, manufacturing is expected to pick up further, and the region should see better growth. The value of the dollar is expected to remain relatively low through 1993 and into 1994; this will continue to be beneficial to Valley manufacturing. The strengthening of U.S. construction and consumer demand will help regional manufacturing, as will investment increases. The moderate growth of the U.S. economy will work to keep the Valley's manufacturing and overall economic growth going but at a pace that continues to be relatively slow for a recovery. Gross regional product is expected to rise by 3.6 percent in 1993, as seen in Figure 2 below.

Manufacturing employment is expected to show overall growth in the region in 1993 despite declining slightly in the nation. Regional durables, and especially transportation equipment and machineries, will again outperform their national counterparts, maintaining their favorable competitive positioning. For example, the Saturn plant has already announced that it will start six-day-a-week production in March and three shifts in June. Nissan is scheduled to have a full year of production for its new Altima line as opposed to the half year in 1992. Nippondenso has announced another expansion for 1993 to be completed in 1994.

Improved U.S. construction activity is also expected to have a favorable effect on lumber, furniture, and carpets, as well as other construction-related regional manufacturing.

As Valley manufacturing improves, so will the rest of the economy, with services employment following suit. Overall, nonfarm payroll employment is expected to rise by 1.9 percent this year.

The improvement in the regional economy is expected to continue but at a moderate pace for a recovery in 1994. Thus, the Valley economy is expected to be better off than the U.S. as a whole, but still tied to the nation's bumpy, moderate recovery.

Dr. Gonzalez is manager of economic forecasting for the Tennessee Valley Authority.
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Title Annotation:The 1993 Economic Outlook
Author:Gonzalez, Juan
Publication:Business Perspectives
Date:Dec 22, 1992
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