The Great Recession and Tennessee’s Revenue Outlook Bill Fox and Matt Murray UT’s Center for Business and Economic Research October 29, 2009

October 2009 Fox and Murray, Center for Business and Economic Research, UT Knoxville2 Nature of the Recession Began in December 2007 NBER dates recessions…peak to trough First global downturn since WWII The longest recession since the Great Depression Records have been shattered 2008 and 2009 home starts (WWII) Will be deepest by some, but not all measures of economic activity Unemployment rates will not likely rival the back-to- back recessions of the 1980s

October 2009 Fox and Murray, Center for Business and Economic Research, UT Knoxville3 Sources of a Rebound Loose monetary policy and Treasury’s response, including TARP Federal Funds target range near zero Unprecedented forms of Fed intervention Fiscal stimulus package, $790 billion Adds more than 2 percentage points to GDP over two years Market forces helping to turn the corner Low housing prices, starts are rebounding Mortgage refinancings create liquidity Inventory accumulation in 3 rd and 4 th quarters

October 2009 Fox and Murray, Center for Business and Economic Research, UT Knoxville4 It Will Take Years to Regain Lost Ground Mixed signals now emerging, the bottom of the current cycle Recession is likely to be deemed over in the third quarter…but this is the trough Very strong growth rates may then take place because economic activity is at such depressed levels-V, U, W or checkmark? Take your pick! Regardless, levels of economic activity will not be restored for some time—jobs, home starts, car sales, tax revenue, etc.

October 2009 Fox and Murray, Center for Business and Economic Research, UT Knoxville5 Source: IHS Global Insight, Inc. Real GDP: 2005 to 2012

October 2009 Fox and Murray, Center for Business and Economic Research, UT Knoxville6 U.S. Residential Fixed Investment and Nonresidential Fixed Investment in Equipment & Software and Structures: 2005 to 2012 Source: IHS Global Insight, Inc. Commercial real estate now spiraling down

October 2009 Fox and Murray, Center for Business and Economic Research, UT Knoxville7 Housing Starts and Light Vehicle Sales: 2005 to 2012 Source: IHS Global Insight, Inc. (millions, annual rate)

October 2009 Fox and Murray, Center for Business and Economic Research, UT Knoxville8 Starts are Picking Up, But Problems in the Housing Market Continue mortgage foreclosure rate (percent) mortgage delinquency rate (percent)

October 2009 Fox and Murray, Center for Business and Economic Research, UT Knoxville9 FHFA Housing Price Index: 2005 to 2012 Source: IHS Global Insight, Inc.

October 2009 Fox and Murray, Center for Business and Economic Research, UT Knoxville10 Tennessee Building Permits: Jan-2005 to Aug-2009 Source: U.S. Census Bureau, Building Permits Survey (as reported in the State of the Cities Data System [SOCDS] database).

October 2009 Fox and Murray, Center for Business and Economic Research, UT Knoxville11 Source: IHS Global Insight, Inc. Federal Funds Rate: to The Fed’s Exit Strategy?

October 2009 Fox and Murray, Center for Business and Economic Research, UT Knoxville12 Source: Bureau of Labor Statistics. U.S. Payroll Employment: Jan-08 to Sept-09 (seasonally adjusted)

October 2009 Fox and Murray, Center for Business and Economic Research, UT Knoxville13 Source: IHS Global Insight, Inc. U.S. Nonfarm Employment: 2005 to 2012

October 2009 Fox and Murray, Center for Business and Economic Research, UT Knoxville14 Source: Bureau of Labor Statistics. *not seasonally adjusted → Change in U.S. Employment* August 2008 vs. August 2009

October 2009 Fox and Murray, Center for Business and Economic Research, UT Knoxville15 Source: Bureau of Labor Statistics. TN Nonfarm Employment: Jan-08 to Aug-09 (seasonally adjusted)

October 2009 Fox and Murray, Center for Business and Economic Research, UT Knoxville16 Source: Bureau of Labor Statistics and CBER-UT. (seasonally adjusted) Tennessee Nonfarm Employment: 2006 to 2011

October 2009 Fox and Murray, Center for Business and Economic Research, UT Knoxville17 Tennessee Monthly Total Nonfarm Employment Indexed to Beginning of Recession Note: Employment data are seasonally adjusted. Source: Calculated by CBER using data from the Bureau of Labor Statistics.

October 2009 Fox and Murray, Center for Business and Economic Research, UT Knoxville18 Tennessee Monthly SA Unemployment Rate Indexed to Beginning of Recession Note: Unemployment rate data are seasonally adjusted. Source: Calculated by CBER using data from the Bureau of Labor Statistics.

October 2009 Fox and Murray, Center for Business and Economic Research, UT Knoxville19 TN Initial Unemployment Insurance Claims and Benefits Paid: Jan-07 to Sept-09 Source: U.S. Department of Labor. September’s drop in the unemployment rate may save the UI trust fund

October 2009 Fox and Murray, Center for Business and Economic Research, UT Knoxville20 Less than 10.0% 10.0% to 12.9% Note: County data are not seasonally adjusted. Source: Bureau of Labor Statistics. 13.0% to 15.9% 16.0% or higher Unemployment Rate, August 2009 Tennessee 10.7% United States 9.6%* September rates: TN 10.3% US 9.5%

21 Growth in Total Tax Revenue Collections, FY /12/ Greater than -5.7% % to -5.7% Less than -10.0% U.S. = -8.2 %

October 2009 Fox and Murray, Center for Business and Economic Research, UT Knoxville22 TN Tax Collections, Total and Sales & Use: Jan-07 to Sept-09 Source: Tennessee Department of Revenue, Revenue Collections, monthly. Stimulus package will help sustain spending thru FY 11/12

October 2009 Fox and Murray, Center for Business and Economic Research, UT Knoxville23 Tennessee Monthly Sales & Use Tax Revenue Indexed to Beginning of Recession Source: Calculated by CBER using data from the Tennessee Department of Revenue.

October 2009 Fox and Murray, Center for Business and Economic Research, UT Knoxville24 TN Long-Term Revenue Forecast (millions of dollars) +$211.7 m

October 2009 Fox and Murray, Center for Business and Economic Research, UT Knoxville25 Highlights The economy is starting to turn the corner, but the recovery will take years State/local sales tax revenues will not recover until 2012, with new pressures emerging for the local property tax Federal pressures on the states State pressures on local governments Pent-up funding needs like the BEP Mid-term growth will trail historical growth due to demographics and need to save, together weakening consumption spending Some are calling this the “new normal” Near-term risks—shocks, inflation, double-dip recession after current inventory cycle—outweigh upside growth potential The good news is the recession is over!

October 2009 Fox and Murray, Center for Business and Economic Research, UT Knoxville26 Center for Business & Economic Research College of Business Administration The University of Tennessee, Knoxville 716 Stokely Management Center 916 Volunteer Boulevard Knoxville, Tennessee phone: fax: