1. Economic Overview
Tennessee Government Finance Officers Association, Memphis, Tennessee
March 16, 2018
Jeff Wallace, Ph.D., Research Associate Professor
Sparks Bureau of Business and Economic Research,
Fogelman College of Business and Economics,
The University of Memphis

3. Tax Rate Cuts
Most Americans will see a tax rate cut. Further, the standard deduction for most people will nearly double. Accordingly, most Americans will see an increase in disposable personal income.
Lowers the federal corporate income tax rate to 20.0 percent from 38.9 percent.
The United States will go from one of the highest rates to one below the 2017 global average of percent;
Makes it more profitable to locate headquarters and operations in the U.S. relative to higher rate countries;
Should result in more jobs in the U.S. in addition to higher incomes, especially if corporations pass on some of the savings to employees in the form of raises. Several corporations have announced pay increases, accordingly.
May not be revenue neutral – federal funds available for all operations may be reduced. Will affect non-mandatory programs the most, if not revenue neutral.
Lowers tax incentive to give to charities.
Has already shown up in adjusted withholding rates. Will show up in sales tax collections.

5. Chart 1. U.S. and Tennessee Unemployment Rate (in Percent), January 2000 ̶ January 2018

6. Chart 2. Low U.S. Unemployment Rates but Room for Employment Growth
This chart shows U3, the civilian unemployment rate, and U6, the unemployment rate that includes discouraged workers, marginally attached workers, and those working part-time for economic reasons.
Absorbing excess labor supply (the difference between U6 and U3) will require wages and benefits to rise.

7. Chart 3. Percent Change from a Year Ago in Employment, Tennessee and the U.S., 1st Quarter ̶ 4th Quarter 2017
Low supply of existing and new homes is driving up prices.

8. Chart 4. Tennessee Labor Force,
1st Quarter ̶ 4th Quarter 2017

9. Table 1. U.S. and Tennessee Employment by Industry, 2017 Percent Change over 2016
Sector
U.S. TN
Total Nonfarm
1.6%
1.2%
Construction
3.4%
12.0%
Manufacturing
0.7%
0.4%
Trade, Transportation, and Utilities
0.9%
2.9%
Information
0.0%
-0.9%
Financial Activities
2.0%
-0.8%
Professional & Business Services
2.1%
-1.2%
Education & Health Services
2.4%
Leisure & Hospitality
2.5%
1.3%
Other Services
1.5%
Government
-1.5%
Source: U.S. Bureau of Labor Statistics. Data are preliminary and NOT seasonally adjusted. All data is establishment based.

10. Chart 5. Annual Percent Change in Mining, Logging, and Construction Employment for Selected Areas, 2016 – 2017
This category was used as a proxy for Construction as the two sectors are combined by BLS for privacy purposes. U.S. data is for construction, alone.
Data is preliminary and current as of March 15, 2018.
Source: U.S. Bureau of Labor Statistics.

11. Chart 6. Annual Construction Employment
in Tennessee,
This category was used as a proxy for Construction.

12. Chart 7. Percent Change from a Year Ago in House Prices for Selected MSAs, 1st Quarter ̶ 4th Quarter 2017
Low supply of existing and new homes is driving up prices.

13. Chart 8. Percent Change from a Year Ago in House Prices for Selected MSAs, 1st Quarter ̶ 4th Quarter 2017
Low supply of existing and new homes is driving up prices.

14. Table 2. Population and Population Change
for Selected Areas, 2010 – 2016
Region
2016
% Change US
323,127,513
4.5%
Tennessee
6,651,194
4.6%
Chattanooga
177,571
4.1%
Knoxville
186,239
4.3%
Memphis
652,717
0.04%
Nashville*
660,388
9.2%
Jackson
67,005
0.2%
Source: U.S. Census, Annual Population Estimates, 2016.
*Nashville city merged with Davidson County in 1962 and is known as Metropolitan Nashville and Davidson County.

15. Average Hourly Earnings
Table 3. Average Hourly Earnings of All Employees, In Dollars For December 2017 (Private Sector)
Region
Average Hourly Earnings
12 Month Percent Change
Tennessee
$22.84
0.8%
Alabama
$23.02
1.0%
Arkansas
$20.98
3.7%
Kentucky
$21.81
1.1%
Mississippi
$20.33
1.2%
Chattanooga, TN-GA
$22.89
-0.6%
Knoxville, TN
$25.09
2.7%
Memphis, TN-MS-AR
$22.36
-0.2%
Nashville*
$25.74
Source: U.S. Bureau of Labor Statistics. Data are NOT seasonally adjusted.
*Nashville city merged with Davidson County in 1962 and is known as Metropolitan Nashville and Davidson County.

16. Chart 9. Real Personal Consumption Expenditures January 2018 to January 2018
The nationally rising personal consumption expenditures should benefit all sectors of the Tennessee economy but particularly manufacturing entities.
Source: Bureau of Economic Analysis, March 1, 2018.

17. NATIONAL SUMMARY – REAL GDP
Real GDP is forecast to grow at 2.8 percent in 2018 but is expected to slow in (Consensus® Forecast).
From Calculated Risk Blog at
From Merrill Lynch: 1Q GDP tracking edged down a tenth to 1.8% qoq saar, while 4Q ticked up to 2.7% [March 6 estimate].
Atlanta Fed: The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2018 is 3.5 percent on March 1, up from 2.6 percent on February 27.
The New York Fed Nowcast for 2018:Q1 stands at 3.0%. [March 2 estimate]
In short, U.S. economic growth is looking positive for the rest of 2018 and heading into 2019.

18. NATIONAL SUMMARY
U.S. nonfarm employment is now in its 8th consecutive year of growth. Most economic indicators suggest continued expansion.
Unemployment rates are at the lowest levels in many years and local employers are having difficulty filling open jobs. As wages begin to rise, more individuals will return to the labor force. Labor force participation remains low at rates not seen since the late 1970s.
Real Disposable Personal Income is forecast to grow quicker in 2018 with the Consensus® Forecast 2.7 percent.
Real Personal Consumption Expenditures (PCE) were up 2.7 percent in 2017 over Since the end of the Great Recession, PCE have increased a total of percent. In 2018 PCE is anticipated to grow 2.8 percent (Consensus® Forecast).
Retail Trade and Food Services sales increased 4.2 percent in 2017 over (Preliminary and in nominal dollars)

19. NATIONAL SUMMARY (continued)
Interest Rates. The Congressional Budget Office expects the federal funds rate to rise gradually over the next few years, reaching 1.1 percent in the fourth quarter of 2017 and 2.8 percent by the end of 2020.
It is also expected that interest rates on federal borrowing will rise gradually over the next few years as the FED tries to regain its primary inflation fighting tool.
Inflation. Inflation remains tame with Consensus Forecasts averaging 2.3 percent for 2018 and 2.2 percent for 2019 (February 12, 2018).
As long as economic growth remains steady, interest rates will rise. First signs of stagnation will likely halt rate increases. Further, low inflation may also slow the FED’s attempt to raise interest rates.
Equity Markets. Growing concerns of an overheated stock market. Bubble may burst.

20. TENNESSEE SUMMARY
Local unemployment rates have fallen to levels not seen since before the recession.
Employment is at the highest level since 2006.
While the last decade suffered from a shrinking labor force, the labor force bottomed out in 2014 and has been growing steadily since.
Evidence of tightness in the labor market with growing numbers of help wanted signs and job fairs. Tennessee average weekly wages are rising in response (QCEW, Mar. 2018).
Employer reports of labor supply shortages. However, too many workers face obstacles to employment including skill shortages, drug abuse history, and medical/health issues, legal barriers, and poor work records.

21. TENNESSEE SUMMARY (continued)
House prices in Tennessee reached pre-recession levels in the 1st quarter of and have only grown since. Tennessee will enjoy increases in sale prices and units sold in 2018 and likely in 2019.
Employment in the Tennessee construction industry has grown substantially over the past year (5.3 percent) but is still below pre- housing-bust levels.
Tennessee real per capita income grew 2.7 percent year-over-year as the 2nd quarter 2017, and has grown steadily since 1st quarter 2014.

22. GRAND SUMMARY – Take Aways
Tax cut effects should be very positive;
Interest rates = Borrowing costs will be rising;
Local Areas need population and business growth to keep revenues growing;
RISK! Trade wars, Real wars, energy market disruptions, Trump Twitters. Biased towards the positive end but there is always a chance to end up negative.