Tennessee's economy is strong but prepare for a slowdown, experts say

Sandy Mazza | The Tennessean

It's been a record-setting decade for growth in the Volunteer State, but finance experts warned budget leaders Friday to prepare for a slowdown.

Most of Tennessee's cities have reaped the benefits during this longest economic boom in history with double-digit jumps in employment and gross domestic product.

However, Tennessee tax collections have only increased 7% in the past decade, when adjusted for inflation.

"That's not a lot of growth," said William Fox, director of the Boyd Center for Business and Economic Research at the University of Tennessee, Knoxville. "Revenue growth would have been stronger, but we had a number of policy decisions to reduce revenues."

Fox and other analysts presented economic outlooks to the State Funding Board on Friday.

The board, which includes Secretary of State Tre Hargett and State Treasurer David Lillard, will use the information to provide revenue estimates to Gov. Bill Lee on Nov. 26 for next year's budget.

A series of recent tax-cutting measures helped nurture the state's business-friendly reputation. But the repeal of the gift, inheritance and estate taxes, and reduced income taxes, have come at a cost.

Fox advised state leaders to be hesitant about cutting any more taxes.

"My fear is what happens in a recession," Fox said. "We've been able to build sizable reserves and that certainly helps us. But the impact of recessions can be quite long-lived."

Finance experts anticipate a nationwide economic slowdown in the next few years, but differ on its timing.

Analysts agreed Friday that Tennessee's economic growth will be more sober in 2020 and 2021.

A 5.4% revenue bump from fiscal year 2018 to 2019 will decrease to 3.9% in 2020 and 3% in 2021, according to the Tennessee Department of Revenue.

Spending levels key to fiscal health

The key to the state's fiscal health lies in consumers' willingness to keep spending, analysts said.

Consumer spending makes up 68% of Tennessee's gross domestic product. So the financial well-being of households is key to growth.

Strong employment numbers gave analysts hope that will continue. Tennessee's 3.4% unemployment rate is lower than the national rate of 3.6%.

Personal income is expected to grow by 3.6% in 2019 and 4% in 2020, the Department of Revenue estimates.

The Nashville branch of the Federal Reserve Bank of Atlanta is closely watching household spending and debt levels for signs of trouble.

"There are two things that I’m paying especially close attention to, both in Tennessee and in the national economy: 1) whether consumer spending is able to be sustained and 2) whether businesses become more willing to make longer-term investments in the future," said Emily Mitchell, director of the Federal Reserve Bank of Atlanta's Nashville research team.

Nashville expansion leads

Nashville's explosive growth has far outpaced the other Tennessee metropolitan areas since 2010.

Total Music City employment grew 32.7% and gross domestic product shot up 41.2%. Memphis, Knoxville, Chattanooga and other cities also experienced increases.

"Workers are getting higher wages, labor market conditions appear to remain healthy," said Joe Newhard, assistant professor at East Tennessee State University's Department of Economics and Finance. "The rate of growth has slowed a bit from last year, but that can be expected as the economy reaches full employment."

Nashville's boom continues to attract new residents from elsewhere in state where there are fewer job opportunities.

"The significant movement of our labor force (in East Tennessee) is something of a concern for us," said Fred Mackara, associate professor at East Tennessee State University's Department of Economics and Finance. "We have real concerns how we're going to consider our productivity."

While analysts say a strong labor market and steady growth will fare well for the state economy during the next two years, they noted signs of concern.

The ongoing trade dispute is causing uncertainty in the manufacturing sector, new housing starts have slowed, and franchise and excise taxes are volatile.

"I continue to see signs of strength in the Tennessee economy," Mitchell said. "Though business leaders we hear from across the state have indicated some heightened risk in the business environment, national economic indicators appear stable at this time."

Sandy Mazza can be reached via email at smazza@tennessean.com, by calling 615-726-5962, or on Twitter @SandyMazza.