Tennessee: entering the growth zone.

In early 2002, expectations of a recovery by the end of the year were dashed by the uncertainty related to corporate accounting and to war with Iraq in a still fragile world economy. The year did allow the economic situation to gain firmer footing, and the signs of a marked acceleration in economic growth are now unmistakable.

Expectations of a mid-year rebound and reality appear to have met in 2003. National Gross Domestic Product (GDP--the sum dollar value of all goods and services produced in the U.S.) is expected to come dose to a 3.0 percent rate of growth for 2003 in spite of a weak start. The Tennessee Valley is outperforming the nation, and the 2003 regional GDP growth rate is projected to be over a quarter percentage point higher than that of the nation.

In contrast to 2002, the recovery that had been led by selective consumer spending has turned the corner and become more broad-based. Demand for more than just autos and housing picked up in the spring. And, production began to respond over the summer, with indicators pointing to a manufacturing sector that has now expanded since July.

Previously, businesses had been meeting demand through productivity increases while cutting costs through layoffs, extremely lean inventories, and a general lack of investment. Business investment is now seeing sturdy growth, and exports have generally improved along with the world economy, adding to overall demand. Further, the business inventory-to-sales ratio remains at record lows. Thus, as demand picks up, businesses not wanting to lose substantial sales will be forced to build inventories, further adding to increased production.

The jobs picture, which has been the main missing piece for a broad-based recovery, also seems to be stabilizing. Layoff activity is abating, and data on payroll employment and continuing claims for unemployment insurance are signaling that more new jobs are being created as well. Although employment growth is yet far from healthy, even manufacturing firms appear to be hiring again.

The early surge in housing and auto and light truck sales has been moderating and will continue to do so. These sectors will remain at relatively high levels but will not provide their earlier boost to the economy. However, the other factors discussed above will provide a solid underpinning to growth and more than make up for this.

There is always the chance that events, particularly non-economic ones such as terrorist activity, will derail the momentum gained over 2003, but the stage is now set for vigorous growth in 2004. National GDP growth is expected to rise to a 4.2 percent rate of growth in 2004. The Valley economy is expected to accelerate even more with a regional GDP growth rate for 2004 approaching 6.0 percent.

Manufacturing Led the Valley Into Recession and Then Into Recovery

The Valley economy went into recession earlier and deeper than did the U.S. due to its greater reliance than the nation on manufacturing. About 23.0 percent of regional GDP is in manufacturing versus 16.0 percent for the nation. As manufacturing slumped in late 2000, the regional economy followed suit. With manufacturing's improvement, however, the Valley's economy was quick to recover, following the path laid out in last year's forecast.

The region's industrial mix has put it in a favorable position versus the nation for the recovery. The region has little industry related to the airline, dot-com, or telecom industries, which have been the dogs of the recovery. Rather, the region has a large concentration in the auto and parts industry and the housing and related industries which have been doing well.

Both of the Valley's major assembly plants near Nashville, Saturn and Nissan, saw sales increases for products from their Tennessee operations. Saturn's introduction of its new VUE SUV and its Ion replacement to the S-series have led to increased production at its plant over last year (even though sales of the latter were not up to expectations). Nissan has performed extremely well. Not only has its remodeled Altima led to increased production, but the Maxima and the new Pathfinder Armada were added to its production line.

Nissan has also just recently opened an assembly plant close to Jackson, Mississippi, supplied to an extent by its parts plant in Decherd, Tennessee, which has been expanding to accommodate increased demand. Toyota opened an engine plant in Huntsville, Alabama, to support its Kentucky/Indiana operations. Other successful new assembly plants in areas surrounding the Valley such as the new Honda minivan plant in Lincoln, Alabama, which opened in the fall of 2001 and is already doubling capacity--have also helped the Valley's auto parts suppliers.

Home-related industries have also seen favorable growth. Even though demand for carpets from the commercial space market has been down due to a dearth of investment, the home market has supported sales, and the region's large carpet industry has also held up its own. The Mississippi part of the Valley was one of the hardest hit during the recession as its dominant furniture industry lost over 12.0 percent of its employment in 2001. Since then, furniture sales have been rising and production along with it. Appliances have likewise benefited from the strong single-family housing market. Also, with the improvements in manufacturing, the trucking industry, which saw strong growth turn to declines with the recession, is now growing again.

Looking Forward

The thing that has been missing from the Valley equation for stronger growth was renewed business investment that would lift the region's machinery and other capital equipment related manufacturing. This industry was among the hardest hit, with significant job losses since its peak in 2000. The recent strong growth in business investment, which is expected to continue, should lead to resurgence of the region's machinery industry and boost not only regional manufacturing, but the overall regional economy.

The Valley's developing auto and light truck industry, which has assumed primary importance in the Valley's economy, should also continue to add momentum to the region's economic growth, even though national demand for vehicles is expected to moderate in 2004. Longer-term trends for the regional industry should more than compensate for this. The regional industry is in an enviable position at the geographic center of the part of the industry that is gaining market share.

The Big Three automakers (GM, Ford, and Chrysler) are losing share to foreign nameplate producers. Toyota, for instance, has now passed Chrysler for the number three slot. Although the Big Three will retain the title for light trucks, foreign nameplate producers are cutting into this market. Whereas only a few years ago, the Big Three were the major players in the segment, foreign nameplate producers are making inroads into it via new investments in light truck assembly plants, mostly in and around the Valley.

Even though most of the assembly plant investments have been announced for just outside the region, the Valley will benefit through increased demand for the products of its expanding parts industry. Major assembly plant investments close to the Valley include Mercedes-Benz's doubling of capacity at its SUV plant in Alabama, as well as the Honda plant in Alabama and the Nissan plant in Mississippi previously discussed. And, Hyundai is locating its first U.S. assembly plant in Alabama, with a 2005 opening schedule.

This is not to say that the auto industry will provide the impetus that it did in the early 1990s when the Saturn plant near Nashville started operations at a time when the rest of the country was foundering. Because of those specific circumstances, the Valley experienced a much faster expansion than did the nation. No such investment is expected in the near future, but the current ones will lead the region's light vehicle and parts industry to greatly outperform its national counterpart over the next few years.

Even though the housing market is expected to continue to recede from the stratospheric levels it attained a year ago, home-related goods sales are still expected to show strong growth. Furniture sales were strong in the fall of 2003, and consumer buying plans even stronger. America's Research Group's Furniture Buying Index, which measures consumer furniture buying plans, had sunk in the spring but has now zoomed back up to levels seen in the heady days of the first half of 2000, greatly raising hopes for sales into next year. Appliance sales are also strong heading into next year.

Other manufacturing will exhibit strong growth as national demand increases in 2004. The apparel industry is the main exception. The collapse that began after the 1994 NAFTA will continue with double-digit percentage employment losses. However, the industry has shrunk to the point that the actual number of jobs lost no longer greatly affects the Valley's manufacturing fortunes.

Outside of manufacturing, the trucking industry will see further growth as goods demand and manufacturing strengthens. The health industry continues to be one of the strongest performers, and the Valley has a concentration centered around Nashville. With brisk economic growth and continued faster-than-national population growth, the Valley will also see robust service sector job growth. Public sector jobs will be restricted by tight state budgets.