Is the Worst Over?
One is tempted to put the first quarter economic data aside and think about what a recovery will be like. But since this is a quarterly report, we really can't escape at least a brief overview of the dreadful economic news earlier this year.
By just about any measure, the first quarter was probably one of the worst for the Nashville and midstate areas in several decades. Dreadful is the word that comes to mind, and often, for in the first quarter we witnessed a very rapid decline in economic activity as the severe recession plowed through just about every corner of the Nashville and midstate economy.
The first quarter brought economic indicators replete with negativity. For example, unemployment grew 30 percent, initial claims for unemployment insurance climbed 25 percent, and housing construction permits plunged 47 percent, and all that just from the previous quarter (Table 1)—dreadful indeed.
The downturn has penetrated the far reaches of the midstate economy. In fact, of all the major industries in the Nashville MSA, only two produced modest job gains: educational and health services and management of enterprises. All other industries lost jobs in the first quarter (Table 2). Over-the-year job losses have been particularly large in the goods-producing industries including manufacturing (-11.1 percent) and natural resources, mining, and construction (-11.3 percent). Manufacturing job losses are most severe in durable goods production, particularly transportation equipment (autos, trucks, and auto parts).
Consumers cut spending in a big way, as shown by very large declines in taxable sales over the year (Table 1). Households are spending less for several reasons: (1) they are saving more of their incomes as a precaution against deteriorating economic conditions, (2) they are unable to maintain previous levels of spending because credit is not nearly as available as in the past, and (3) they simply have less income to spend when one or more family members become unemployed.
Thankfully, the first quarter is history. While the labor market is likely to bring bad news for months to come, we see signs of improvement for two important indicators. First, single-family home construction appears to have leveled off during the first quarter. As shown in Figure 1, single-family home construction hit bottom in November at 252 permits, climbing marginally to 287 permits in March. Although the smoothed trend for permits is still declining, the rate of decline has slowed considerably. Given the current pattern, the longer-term trend should hit bottom during the second quarter.
Given the very large amount of inventory and continued downward pressure on housing prices, we do not expect a strong recovery for housing construction. Single-family construction will slide sideways for the next year or so, at best producing a modest increase.
Total housing construction (single-family plus multifamily) is a different story altogether. A large inventory plus losses on development loans will add to already large declines in multifamily permits.
Second, initial claims for unemployment insurance for Tennessee may have peaked. Initial claims count the number of first-time applications for unemployment insurance filed during a given week—thought to be a useful indicator of the future unemployment rate. In recent months, a rising level of initial claims has been strongly related to the accelerating increases in the unemployment rate. For example, initial claims rose 28 percent during the previous quarter, reasonably close to the 25 percent rise in the number of unemployed in the Nashville MSA.
Initial claims have leveled off during the past several weeks, but this does not mean that the unemployment rate will soon begin to decline—far from it, as initial claims remain at a very high level. It does mean, however, that some of the upward pressure on unemployment has diminished; the high level of initial claims will continue to push the unemployment rate higher but not nearly as quickly as in the first quarter.
Table 3 presents details for the Chattanooga and Clarksville metropolitan areas. Both metro areas experienced large increases in the unemployment rate, but nonfarm job loss was less in Chattanooga than in Clarksville. Also, taxable sales are performing better in Clarksville. Both metro areas experienced gains in housing construction permits from the previous quarter, with Clarksville showing a large over-the-year gain in single-family home construction.