Downturn Deepens
The economic downturn deepened in the second quarter as evidenced by a sharp rise in unemployment, falling nonfarm employment, and lower taxable sales compared with the first quarter (Table 1). The only news that brings any relief is from an unexpected source: housing. Permits issued for construction show just a small decline in the second quarter, and the total value of permits actually rose.
The rapid rise in the unemployment rate is the big news for the second quarter: unemployment soared by nearly 8,000 for the Nashville MSA, a 12.8 percent increase from the previous quarter, and the unemployment rate climbed to 5.7 percent. While not recession-level high, the most concerning part of this is just how rapidly unemployment has climbed: over the year, the number of unemployed jumped 36 percent, with one-third of this rise occurring in the second quarter.
The rising unemployment rate is driven in part by a large increase in the number of workers filing for unemployment insurance, up 18.7 percent from the first quarter and 30.4 percent over the year. Rising initial unemployment insurance claims is indicative of substantial workforce reductions among area employers.
A puzzling feature of the current situation is the very minimal negative response of nonfarm employment. One would have expected a large decrease in nonfarm employment instead of the modest increase we have been witnessing. After all, when more workers draw unemployment insurance, it is because firms have let workers go. But our data are telling us that unemployment has increased by 7,800 from the first quarter, but nonfarm employment has dropped by just 1,000. Part of the difference might be explained by the manner in which the numbers are developed: nonfarm employment is estimated from a monthly survey of employers, while unemployment and the unemployment rate are figured from a monthly survey of households.
The housing construction, real estate, and mortgage markets offer mixed news for Tennessee; mixed meaning "not all bad news." First, as mentioned earlier, housing construction appears to be at or near its low: single-family home construction is down just 1.8 percent from the first quarter, and the total value of single-family homes actually posted a modest 2.1 percent gain (Figure 1). To be sure, home construction still is far behind year-ago levels but shows improvement from the previous quarter. We may have reached the turning point for housing construction in the Nashville area.
Though housing construction may have bottomed, the mortgage market has not, as the number of mortgages in trouble continued to rise in the second quarter for both the United States and Tennessee. We have three indicators for troubled mortgages: (1) the percent of mortgages that are delinquent, or behind in payments, (2) the percent of mortgages entering foreclosure during a particular quarter, and (3) the inventory of all mortgages in foreclosure as a percent of all mortgages. According to figures from the Mortgage Bankers Association of America, foreclosure starts continue to rise at about the same rate as experienced during the past five quarters, with the second quarter at 0.78 percent compared with 0.73 for the first quarter. Falling home sales combined with a rising number of new foreclosures caused the inventory of foreclosed homes to rise from 1.48 percent to 1.58 percent, still well below the recent high of 1.85 percent reached for Tennessee in 2003 (Figure 2).
In the Nashville residential real estate market, sales of single-family homes continued to decline but not as quickly as in previous months. In fact, the fall in sales for July was the smallest decline we have experienced since January 2007. Assuming the present trend continues, sales will reach bottom five or six months from now (January or February of 2009) and slowly increase thereafter.
Along these same lines, the inventory of single-family homes in the Nashville area peaked in April at 15,300 units; the August figure of 15,033 is nearly 2% lower, after seasonal adjustments. Sales continue to fall, but the pace of decline has diminished somewhat; when we examine the underlying sales trend (free from seasonality and idiosyncratic bumps), we find that the monthly decline in sales is the smallest since late in 2006. At the current pace, sales should reach bottom sometime in the first quarter of 2009, barring a significant deterioration of conditions in the mortgage market.
Nashville's nonfarm employment declined slightly in the second quarter, down about 900 jobs (0.1 percent) from the first quarter. Most job losses occurred in manufacturing (-1.7% from the first quarter), transportation and utilities (-0.8%), finance and insurance (-0.9%), and educational services (-0.*%). Food services and drinking places and arts, entertainment, and recreation experienced smaller employment declines. Several other sectors continued to add jobs including retail trade, wholesale trade, information, professional, scientific, and technical services, and health care (Table 3).
The Chattanooga and Clarksville metropolitan areas also feel the economic slowdown (Table 4). Nonfarm employment is on the decline in Chattanooga, down 0.3 percent from the first quarter, causing the unemployment rate to rise to 5.3%. Single-family permits show an increase from the first quarter, however, and taxable sales continue to rise but at a very modest pace. In Clarksville, nonfarm employment is flat, and the unemployment rate is rising. Taxable sales experienced a favorable gain, but housing construction continued to plunge.