The midstate economy struggled again during the fourth quarter, with single-family home construction and sales tax collections the only significant sources of improvement.
Total employment plunged during the quarter, with both the midstate and Nashville MSA showing job losses of more than 5 percent over the year.
Nonfarm employment provides a more positive picture, declining 3.6 percent over the year but posting a small increase from the previous quarter. Some specific sectors, such as trade, professional and scientific services, and educational services, also show gains from the third quarter. In manufacturing, durable goods lost jobs, but nondurable goods increased employment slightly. In all, the rate of decline has slowed, and some sectors are showing small gains.
The unemployment rate, steady at 10.2 percent for the midstate and 9.3 percent for the Nashville MSA, has shown little change for the third consecutive quarter.
This news is not as positive as it seems because the lower unemployment rate reflects the reality that thousands of Tennesseans have stopped searching for work, as evidenced by the substantial decline in the labor force.
To illustrate, total employment in the midstate declined 64,000 over the year, but unemployment rose just 34,000; the difference, 30,000 workers, represent those who have dropped out of the labor force.
The flat unemployment rate masks the degree of labor market stress. If all those who lost jobs during the past year had remained in the labor force, the unemployment rate would have increased to 12.3 percent for the midstate and 11.3 percent for the Nashville MSA.
In addition, many more thousands of Tennesseans are working part-time instead of full-time or are employed in jobs that underutilize their experience and skills. These are the underemployed, as documented in a recent BERC study on south central Tennessee.
Reducing the unemployment rate to the level that existed before the recession will require many months of sustained employment growth; this will undoubtedly be the most challenging task for the nascent economic recovery.
In order to bring down the unemployment rate to the status quo ante, two things must occur. First, the economy must generate enough new jobs to recover those lost during the past two years. Second, the economy must generate enough jobs to absorb new entrants to the labor force, including inmigrants from other counties and states, new high school graduates, and new college graduates. Thus, we need employment growth to bring down the unemployment rate—and more employment growth to keep it there.
One of the few positive outcomes of the fourth quarter is the continued growth of single-family home construction. Permits issued for construction hit bottom in the first quarter and have increased in subsequent quarters. Activity in the fourth quarter is 25.9 percent higher over the year but remains much lower than pre-recession levels.
Construction of multi-family units, including apartments and town houses, has not fared as well. Multi-family construction is 27.3 percent lower over the year but experienced a very large spurt of activity during the fourth quarter. Multi-family housing is experiencing credit availability problems more severe than for single-family housing.
Although improvement is welcome, sustained housing growth is facing a number of issues going forward. First, the Federal Reserve has signaled that it will begin to unwind its position in the mortgage market. Over the past year, the Fed has purchased large amounts of mortgage-backed securities in order to provide a base level of demand for mortgages, putting downward pressure on mortgage rates. As the Fed eases up its purchases and begins selling its stock of mortgage securities, this will create upward pressure on mortgage rates. Second, the Federal Housing Administration has announced it will tighten its lending requirements in order to forestall anticipated future loan losses. This will mean that some classes of borrowers may no longer qualify for an FHA-backed loan. And third, the first-time home buyer tax credit is scheduled to expire at the end of April 2010. The net effect of these three upcoming events remains to be seen.
The second important indicator to show improvement is sales tax collections—up from the previous quarter in both the midstate and Nashville MSA although lower over the year. Even with these gains, sales tax collections are 5 percent lower than estimated for the state government budget through seven months of the present fiscal year.
The Chattanooga and Clarksville metropolitan areas show similar improvement for single-family home construction and sales tax collections: from the previous quarter, single-family home construction rose more than 10 percent in both MSAs, and sales tax collections are somewhat higher.