Experts and state officials told the State Funding Board on Wednesday that Tennessee's economy will likely bottom out during the third quarter before beginning a recovery projected to take anywhere from two to seven years.
Economists presented varying possibilities for the state's economic recovery — ranging from optimistic to grim — that are indicative of their uncertainty about consumer spending in the coming years. Such activity produces 60 percent of the state’s tax revenues.
Laurel Graefe, regional executive with the Federal Reserve Bank of Atlanta, said the pace at which the state economy returns to normal levels will rely heavily on the job market of the near future. According to national unemployment data, a large majority of workers receiving unemployment benefits plan to return to their jobs — roughly 18 million of the 23 million who filed in April said their layoffs were temporary — and applications for continued jobless claims are falling, meaning some are already going back to work.
Whether workers temporarily furloughed are able to come back to work in the coming months or become permanently laid off will be a key factor in the economic recovery. Graefe said that will depend on workforce productivity, consumer demand and how businesses adapting to new social norms might need less labor.
“We don’t have much experience with this because, traditionally, recessions come on slower and when people lose their jobs during recessions, it’s more a permanent job loss,” Graefe said. “This time is different because the economic downturn was sudden and so were the furloughs. There is no historical precedent to know for sure.”
Still, University of Tennessee professor of economics William Fox predicted Wednesday that the state's jobless rate will top 20 percent in May and June. But despite those metrics and a 14 percent fall in sales tax so far this year, Fox predicts the state’s revenues will decrease only slightly — and maybe not at all — year over year because of the significant growth the state saw during January, February and early March. That compares to a revenue drop of 8.7 percent in 2009 during the Great Recession.
“If any other time in history, you told me there was a 14 percent decline in sales tax, I would think we are in the worst economic downturn in history,” Fox said. “But this is actually better than I thought.”
Another surprising data point was county-level revenue, Fox said: 90 of the state’s 95 counties saw revenue growth in April compared to an 8 percent drop at the state level.
The Tennessee Department of Revenue provided a more conservative estimate of the state’s revenue losses, projecting it will end the year 3.2 percent down from the mark of the last fiscal year. Relying on a Moody’s Investors Service forecast, state officials said they estimate it will take three to four years to fully recover from the economic damage caused by shut-in orders. By early 2022, they added, the economy should be back where it was at the beginning of March.