The 2004 economic outlook for the Memphis MSA.

Economically speaking, 2003 was a rollercoaster of a year. The first quarter of 2003 started off slowly, with great uncertainty about the impact of a potential war in Iraq, but picked up steam in the second quarter, particularly after most of the major battles in Iraq had subsided. The pace of growth grew even faster in the third quarter with Gross Domestic Product (GDP) rising by an astounding 8.2 percent. But, growth is anticipated to fall back to a more realistic level of around 4.0 percent in the fourth quarter, with moderate growth continuing into 2004.

All of the above growth was national. However, the rebounding national economy has yet to make much of an impact on Memphis. Or, maybe the economic recovery has hit the Memphis area, but the growth has been substantially muted by the aftermath of the July 22 windstorm that paralyzed much of the city for days. If this is true, then the impact of the storm would have been substantially worse in the absence of rebounding national and local economies.

The Impact of the July 22, 2003, Windstorm on the Memphis Economy

So, what happened to the Memphis economy as a result of the July 22nd storm? Quite a bit of damage, as estimated in the following analysis. Provided is a brief overview of selected areas of loss suffered in the Memphis economy as a result of the severe windstorm of July 22, 2003. While detailed in nature, the review is not all-inclusive. In particular, the focus is on lost income by area residents and businesses and lost retail sales due to temporary business closures associated with storm damage and power losses. The analysis does not look at insurance claims and structural damage losses. It is focused on losses in the whole of Shelby County, since the impact of the storm was concentrated within that area. Because of this, loss estimates presented may be underestimated due to losses incurred in surrounding counties.

Using 2002 total retail sales for Shelby County (including all municipalities) an estimate of 2003 average daily retail sales by sector was derived. As Table 1 shows, the Sparks Bureau of Business and Economic Research (SBBER) estimates that there is an average of nearly $32 million in retail sales daily in Shelby County across all sectors.

Using the 2003 daily average retail sales figures from Table 1, losses in retail sales by sector by day were estimated. In Table 2, assumptions of the percentage of all businesses closed due to lack of power or storm damage were used to develop estimates of total daily retail sales lost, with the percentage of closed businesses ranging from around 70.0 percent on day one (July 22) to one half percent by day 15 (August 5). The declining percentages of closed businesses reflect an estimate (by the SBBER and not by Memphis Light, Gas, and Water (MLGW)) of how fast power was restored in aggregate and how fast businesses were able to reopen after having made necessary repairs.

As Table 2 shows, the losses were greatest on day 1 at approximately $22.4 million and decline to just under $160,000 by day 15. By sector, the losses range from a total of $30.1 million for autos, boats, and aircraft down to just over $2.0 million for service stations.

Memphis' losses are not limited to direct, storm-related lost sales revenues, however. Area workers and business owners also lost wages and salaries during the time they were unable to work due to storm-related damage and power losses. Table 3 presents the forecast 2003 total personal income (TPI) and 2003 daily average total personal income. Beginning with the 2001 TPI figure for Shelby County from the U.S. Bureau of Economic Analysis, a 2003 estimate was derived using an inflation rate of 3.73 percent, resulting in 2003 TPI of just over $30.2 billion. Wages and salaries average about 62.9 percent of TPI; thus, Shelby County's 2003 total wages and salaries equal just over $19 billion. Dividing 2003 total wages and salaries by 365 then derived daily average wages and salaries of nearly $52.2 million.

In Table 4, the Shelby County daily average wages and salaries from Table 3 were used to derive estimated lost wages and salaries for each of the projected total 15 days of storm damage recovery, which impacted both employers and employees. Similar to Table 2, assumptions of the percentage of businesses closed due to lack of power or storm damage were used to develop estimates of lost wages and salaries associated with closed businesses and unpaid time off for employees, with the percentage of closed businesses ranging from 70.0 percent on day 1 (July 22) to one-half percent by day 15 (August 5).

As shown in Table 4, the worst of the losses occurred immediately on the day of the storm, with an estimated 70.0 percent of local businesses closed, resulting in wage and salary losses of over $36 million. As power was restored and businesses recovered from damages and reopened, the daily losses shrank to over $260,000 by day 15, with an estimated one-half percent of businesses still closed and in recovery mode. Cumulatively, the SBBER estimates there was a loss of nearly $189.4 million in wages and salaries. In sum, the SBBER estimates a total of over $116 million lost in retail sales as a direct result of the storm, in addition to direct, storm-related losses of wages and salaries totaling nearly $190 million.

Direct losses are, however, just the first part of the economic impact. The direct losses turned into indirect losses as the businesses and individuals who suffered these losses then had less money to put back into the economy, which has impacted all sectors of the Memphis economy through the multiplier effect (in which one person's income is spent and thereby becomes another person's income). The Memphis area economy, therefore, has been negatively impacted both directly and indirectly from the July 22nd storm. The estimated losses presented here are probably on the low side as they do not include losses incurred in the counties surrounding Shelby County, Tennessee, do not include insurance and damage losses, and do not include losses incurred due to the multiplier effect of lost spending due to lost income. An estimate of total losses of all kinds would likely be in the neighborhood of $550 million to $600 million.

Recent Trends in the Memphis Economy

Table 5 shows that local job growth numbers have been weak since the recession started, but some sectors are growing despite an appearance of overall weakness. In fact, residence-based employment data (based upon where the worker lives) from January 2000 to October 2003 (the latest data available) in Chart 1 suggest that while the rest of the nation's labor situation is improving, the Memphis MSA's labor market is stagnant at best. In fact, the total number of employed residents in 2003 generally lagged behind the employment levels of 2002 and as of November 2003 (the latest period for which data are available) was approaching the employment levels of 1999. This is further confirmed in looking at Memphis MSA unemployment rates over the same time period in Chart 2. In looking at the progression of the Memphis MSA's unemployment rate in Chart 2, it appears that 2003 local unemployment was rising instead of falling, just the opposite of the current trend in national unemployment rates.

Selected Sector Notes

Construction employment peaked in 1999 and has trended lower since then. However, assuming that local business spending and business and investor confidence rise with the national economy, construction employment should increase and, in fact, did increase (year over year) in both October and November 2003.

Manufacturing losses will continue and result in plant closures throughout Tennessee. Even Memphis with its small manufacturing sector has experienced job losses. Parts of these losses are structural in nature. Manufacturers are looking to both increased productivity through technology and lower labor costs in other countries in the ever-constant quest for profitability. Both of these factors necessarily dictate fewer workers needed domestically in manufacturing processes, but particularly on the low-skilled end of the spectrum.

With time for adaptation, however, technological advances introduced into manufacturing processes domestically will spur manufacturers to search for and hire a better-skilled and educated workforce. And, if manufacturers cannot find this labor in the Memphis area, they will import it from outside Memphis, at best, or simply leave the area, at worst. Accordingly, for Memphis to be successful in this environment will require that it educate its citizens to meet the needs of the Memphis economy of tomorrow and not just the needs of today.

Local home sales and prices are still strong on the basis of low mortgage rates, as shown in Table 6. As long as interest rates remain low and the economic recovery appears solid, the local housing market should see continued growth into 2004. The only foreseeable risk to the local housing industry at this time could be an increase in interest rates, assuming that the national economy continues to grow strongly and inflation rears its ugly head, but inflation appears to be well under control at this time. The slight decreases in sales prices may indicate either slackening demand or too much supply, but only modestly so.