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The Tennessee Valley: a strong finish in '92?

At the beginning of 1991, the nation and the TVA region were both deeply mired in recession. After the quick resolution of the Gulf War, consumer confidence and demand returned; growth from the latter part of the second quarter through the third brought hopes that a recovery was underway.

Manufacturing was quick to come back as relatively low inventory levels allowed the increased demand to be translated in to increased production, and manufacturing employment in the Valley grew over this period.

However, long-term economic problems kept the growth from being the strong growth normally seen in a recovery. This resulted in consumer confidence again experiencing a big drop and growth slowing to a crawl in the fourth quarter. It now appears that recovery will not occur until well into 1992.


The recovery has essentially been choked off by the long-term problems with the U.S. economy, including the budget deficit, the fragile financial system, and the competition-driven need for restructuring of firms. These have served to make government policy relatively ineffective and to hamper growth. The U.S. deficit has, as predicted, kept fiscal policy handcuffed, and monetary policy has not turned out to be as stimulative as expected.

Although the Federal Reserve (Fed) has been grudgingly but consistently lowering short-term interest rates, the rate of loan growth has remained disappointingly low. The aftermath of the savings and loan crisis has taken its toll, and banks have tightened credit standards. The resulting "credit crunch" has especially hurt small and construction businesses that have little choice as to sources of capital.

Also, the bank situation and high interest rates in Germany and Japan have helped keep long-term interest rates in the U.S. relatively high until recently, in spite of the falling short-term rates. Both of these factors have kept monetary policy from being as stimulative as normally expected.

More important than government policy in the slow growth during the second half of 1991 has been the job situation. While employment has always been one of the last factors to recover from a recession, several long-term trends have contributed to even slower growth in employment in the latter part of 1991. Problems with government budgets, not just at the national level but for state and local governments, have limited growth of government employment and have even led to some layoffs. Cuts in government defense spending have also led to cutbacks by defense contractors.

The trade and service sector which usually grows quickly during a recovery has been sluggish. This sector has been experiencing the same type of competition-driven cost cutting that manufacturing began experiencing in the 1980s. Manufacturers also have continued to restructure as evidenced by IBM's and GM's recent announcements. Thus, many jobs that were lost during the recession are not being replaced and layoffs continue.

The job situation has made consumers very cautious, and consumer sentiment declined sharply in October and November of 1991. Indeed, the consumer has been drawing down the debt burden accumulated over the 1980s, and demand for big-ticket items such as autos has been slow. Income growth, however, had been sufficient to keep the Christmas retailing season from being terrible overall.

The problems with the economy and the resulting anemic growth have dampened the expectations for growth in 1992 and even brought the specter of a deepening recession to the outlook. However, income has been gaining ground and leading economic indicators have not really dipped, only been basically flat since July 1991. In spite of a setback in November, which can mainly be attributed to inclement weather, construction also appears to be gaining ground with the recent lowering of long-term rates.

The lowering by the Fed of the discount rate by a full percentage point to 3.5 percent in December provided a needed boost. Some kind of moderate tax cut package is also expected by the spring which likewise will provide a boost. With this, consumer confidence and demand should again pick up, and the U.S. economy is not expected to see any significant decline.

Nevertheless, current problems will continue into 1992, and stronger economic growth can be expected only by the middle of 1992. Overall, the U.S. economy should at best post a 2.4 percent increase in GNP in 1992.


Overall, the Tennessee Valley has fared reasonably well during this recession, especially compared to the 1982 recession. In 1982, regional unemployment rates were 2.5 percentage points higher than the national rate. In contrast, throughout this whole recession period, regional unemployment rates have only maintained about the 0.2 to 0.3 percentage point higher level evident before the recession, as seen in Figure 1 on the next page.

The main reason for this is that manufacturing has not been hit as disproportionately in this recession as it was in the one in 1982. Manufacturing employment has been helped by the low value of the dollar over the recent period, making U.S. manufactured goods more competitive not only abroad but in the domestic market as well. This has been especially beneficial to the Valley which has a high proportion of manufacturing that is vulnerable to foreign competition. In contrast, the U.S. commercial sector has been faring less well as discussed above.

With the expansion in consumer demand after the Gulf War, manufacturing employment has been rising in both the U.S. and the region since June. Further, manufacturing employment has done better in the region than in the U.S. In the region, it is on track for an overall decline in 1991 of 2.1 percent, which compares favorably with the expected 3.5 percent decline in the nation.

Part of the better performance in manufacturing is due to the greater proportion of nondurable manufacturing in the region; nondurables have performed better over the recession than durables. However, more important is the better-than-national performance of durables over the recession in the region. Whereas durable goods manufacturing employment is expected to show a decline of 5.0 percent in the U.S. in 1991, the regional counterpart is only expected to decline 2.8 percent. The strength of durables in the Valley was already evident in 1990 when the region posted a 0.7 percent increase in durable goods employment, while the nation posted a 2.7 percent decline.

Transportation equipment was exemplary of this. While the national industry mired in decline, the region posted a slight gain in 1990. Newer plants in the Valley contributed to the better performance, such as the start up of the Saturn plant near Nashville in 1990. The low dollar also helped. With the low dollar, it is more cost-effective for foreign producers with U.S. plants to produce in the U.S. for U.S. consumption than to export their goods into the U.S. The Valley benefitted from this since there are several foreign plants in the Valley (for example, the Nissan plant in Smyrna, Tennessee). The Valley has also thus far experienced a favorable allocation in the lower levels of defense spending.

The relatively good performance of manufacturing has kept the Valley basically following the U.S. pattern over the recession. Overall for 1991, Gross Regional Product is expected to have declined 0.7 percent. This compares favorably with the expected 0.5 percent decline in GNP for the United States.

The reason that regional performance overall has not been better than that in the U.S. is the more important role that manufacturing plays in the regional economy as compared to the nation. Manufacturing employment makes up 28 percent of total civilian nonagricultural wage and salary employment in the region. In the U.S., the respective proportion is only 18 percent. Consequently, the same percentage decline in manufacturing employment in both the region and the nation would mean a larger percentage decline in total employment for the region. Thus, commercial-sector growth in the U.S. counterbalances the manufacturing decline, and the region and the nation are expected to end up with about the same slight decline in 1991.


Just as the performance of Valley manufacturing helped the regional economy in 1991, it will lead the Valley's recovery in mid-1992 as national demand recovers. The value of the dollar is expected to remain low in 1992 and continue to benefit Valley manufacturing. Unfortunately, the weakness of the U.S. economy, and particularly consumer demand, in the first part of 1992 will cause some retrenchment in the advance of regional manufacturing that was experienced in 1991.

Already the anemic U.S. growth led to a slight decline in national industrial production in November. Manufacturing employment in the region is likely to experience a slight decline in the first quarter of 1992.

Strengthening of construction and consumer demand in late spring will again be quickly translated into increases in manufacturing due to the relatively low levels of inventories. Increases in investment will also contribute to manufacturing improvements. Again, the region is expected to do better in transportation equipment and other durables than the nation as a whole. As 1992 progresses, the region should see more growth as manufacturing picks up further.

Overall for 1992, the region is expected to perform better than the nation. As seen in Figure 2 and Table 1, manufacturing employment is expected to show positive growth in the region for the year despite remaining slightly negative for the nation. Construction should see a much better year TABULAR DATA OMITTED in the region, while improving but remaining poor in the nation mainly due to the continuing problems with real estate in the northeast.

These improvements will also lead to improvements in the commercial sector. Gross Regional Product is, thus, expected to rise by 3.6 percent in 1992, better than the 2.4 percent increase expected for GNP. The improvement in the economy is expected to continue more strongly in 1993 with an increase in Gross Regional Product of 4.7 percent.

Although the scenario presented above has a good likelihood of occurring, there currently exists a great deal of uncertainty. The Federal government could use fiscal policy to stimulate the economy considerably more than expected. This is not too likely, even in an election year, due to the acrimonious inflationary and interest rate effects the expansion of the budget deficit would have on the economy in subsequent years.

More likely is that consumer and business confidence will return more slowly than expected, the recession will be deeper, and the job situation will remain stagnant until much later in 1992. Thus, although the scenario presented above is the most likely, it is somewhat optimistic.

Dr. Gonzalez is manager of economic forecasting for the Tennessee Valley Authority.
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Title Annotation:Tennessee Valley Authority
Author:Gonzalez, Juan E.
Publication:Business Perspectives
Date:Dec 22, 1991
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