The Great Recession Comes to a Close
The good news is that the recession is over. The bad news is that this has been the most serious and longest domestic economic downturn, and the first global recession, since the Great Depression. The national, state and regional economies have all contracted sharply since the beginning of the recession in December of 2007. Jobs and housing starts have plummeted, while the unemployment rate spiked significantly over the course of 2009. By August, the unemployment rate in the Johnson City Metropolitan Statistical Area (MSA) had moved to 9.8 percent from 6.2 percent in the previous year. The Kingsport-Bristol MSA fared only slightly better as its unemployment rate rose from 5.8 percent last August to 9.5 percent this year. Despite the rise, the region’s unemployment rates are a better than the statewide unemployment rate which stood at 10.7 percent August. Hopefully the coming months will bring goods news, following on the lead of the state--the state unemployment rate dipped to 10.5 percent in September.
The national economy has now lost about 8 million jobs since the peak of economic activity prior to the recession, though the rate of job decay has improved since the winter months. The fall in economic activity has been unprecedented. Nationwide, annualized housing starts have fallen to only one quarter of their traditional levels, well below the rate of starts dating back to World War II. There are now emerging signs of stabilization in the housing market, with prices and building permits now picking up on a month-to-month basis. But delinquencies and foreclosures continue to rise. The first quarter of the year was nothing less than scary. Nonresidential fixed investment fell 39.2 percent, residential investment fell 29.9 percent, exports were down 29.9 percent and imports were down 36.4 percent. At the end of the first quarter, it looked like the bottom was falling out of the national economy.
Tennessee’s economy took a nosedive in the first quarter of the year as well. Nonfarm jobs dipped 6.7 percent and not a single sector, aside from government, saw growth in the first quarter. Manufacturing has been hit especially hard. The first quarter produced a setback of 18.6 percent, with the losses narrowing to 12.8 percent in the second quarter. Given the depth of the freefall in the first quarter, any improvement in the second quarter has to be greeted warmly. Single-family building permits were down over 51 percent in August compared to August of last year…and last year’s permits were down sharply from the previous year. But August’s rate of permitting was the highest since September of 2008, suggesting that the state’s residential housing sector has bottomed out and is now on the mend.
Most counties in the Tri-Cities region saw building permits grow in the second quarter over the first quarter, though the levels remain very low. Jobs in the Johnson City MSA were down 3.0 percent in August over the previous August, while employment in the Kingsport MSA was off 3.9 percent. Education and health services were the only sectors to show job growth for each of the MSAs.
The mixed signals that are now emerging offer the promise of a more broad-based turnaround in economic activity in the quarters ahead. An important caveat is that economic activity has fallen to such low levels that it will take a considerable period of time to simply recover lost ground. The building blocks of an expansion are being laid by the global and the national economies. International and domestic monetary and fiscal stimulus has been effective in averting an outright depression. Low interest rates and unprecedented forms of intervention on the part of the Federal Reserve and the U.S. Treasury have helped restore confidence by increasing liquidity in the financial markets. While lending remains tight, the commercial paper market and other components of the financial system are now functioning again. Fiscal stimulus is expected to add at least one percentage point to economic growth both this year and next year.
Market forces are now turning the corner. The stock market is on a roll, helping to rebuild the stock of wealth that was erased last fall. Mortgage refinancings have increased household liquidity, helping to restore savings and boost consumption. Low home prices and increased affordability are bringing buyers back to the housing market. The inventory of unsold homes is falling rapidly, setting the stage for stronger growth. This will ripple across the economy, boosting building material and home furnishing sales, and state and local sales tax revenue. Business investment—especially in equipment and software—should start growing at strong rates. Investment in structures, notably commercial structures, will be a drag on growth in the near term as there is a glut of commercial space in Tennessee and across the country. Expect further deterioration in commercial construction and new pressures on financial institutions as this sector seeks to stabilize. The state and national manufacturing sectors should benefit this quarter and in the third quarter from inventory accumulation that is needed to restock the shelves of warehouses and retailers.
The weak spot in the expansion will be the labor market. Uncertainties regarding the robustness of the recovery will temper hiring. Moreover, with growth expected to be modest, there will be no need for businesses to add significant numbers of workers to their payrolls. Job growth in Tennessee and the nation will return to the black in the second quarter of 2010. But jobs will nonetheless contract next year. The anticipated 0.8 percent decline for Tennessee does represent marked improvement over the 4.1 percent setback expected for 2009. Unfortunately, the unemployment rate will remain above 10 percent well into 2011.
This has been a wrenching recession and few Tennesseans have been spared its wrath. Fortunately, it appears that the economy is finally turning the corner. The expansion is likely to be sluggish, with setbacks along the way. And it will be a long road to return the economy to the peak levels of economic activity that prevailed prior to the recession. But the recession is over and it is now time to look forward to better economic times.