Recession drags on

If you thought 2008 ended badly, be prepared for a slower start to 2009.

Middle Tennessee's economy probably will continue to deteriorate well into the new year. Rising unemployment, a stagnant housing market and uncertainty about one of the area's most important industries, auto manufacturing, will cast a pall over the region, economists, business people and other observers say.

Some see hopeful signs in everything from plans to build solar-panel components in Clarksville to lower mortgage rates making home purchases more affordable. But other analysts expect consumer pessimism and tight lending standards to squeeze the local economy for at least the first six months of 2009.

"I think we're still in the beginning of the recessionary period," said Ralph Schulz, president of the Nashville Area Chamber of Commerce. "No one knows quite how long it's going to take."

The early data on the recession suggest Middle Tennessee could experience a milder downturn than most of the country. The area's unemployment rate — one of the best indicators of the health of the Nashville area's economy — remains below the national average, for instance.

But the region's fortunes will nonetheless be shaped by the tumultuous economy around the globe. Not even the pillars of Middle Tennessee's oft-touted economic diversification, industries such as health care and manufacturing, are strong enough to remain unshaken by what's expected to be the worst recession since the early 1980s.

"No region … is ever going to be insulated against global trends," said Achintya Ray, a professor of economics at Tennessee State University. "I'm not trying to take the very narrow position that we are special."

Manufacturing tumbles

One of the biggest questions facing the Middle Tennessee economy is the future of its auto industry.

Plummeting demand for cars and trucks has led to production cuts at Nissan's plant in Smyrna and General Motors' plant in Spring Hill. General Motors has taken the additional step of shutting down Spring Hill through the entire month of January, idling 700 of the plant's 3,000 line workers.

"People are underestimating the importance of autoworkers," said Mike Herron, chairman of the Spring Hill chapter of the United Auto Workers union. "We'll get a good idea of the impact in January."

GM is set to receive a portion of a $17.4 billion federal aid package next year, but conditions placed on the money mean there's a chance GM could be forced into bankruptcy. If the Spring Hill plant were ever to close as a result of that, more than 30,000 jobs could be lost throughout Middle Tennessee, Herron said, citing a recent study by the independent Center for Automotive Research.

The impact would affect companies that supply the Spring Hill plant and spread to businesses that normally benefit from spending by autoworkers.

GM and Nissan aren't the only carmakers that are suffering. Other major carmakers, many of which also are customers of the companies that supply parts to GM and Nissan, are cutting production as well. Toyota has delayed plans to build a new plant in northern Mississippi.

German carmaker Volks wagen, though, remains on track to build a $1 billion assembly plant in Chattanooga.

Matt Kisber, the state's commissioner for economic development, says he remains certain that the project will continue. Whereas Toyota already has 13 parts and vehicle manufacturing plants in North America, Volks wagen has only one — in Mexico.

Volkswagen believes it must expand its production capacity in the United States if it's going to become a bigger player in the American market, Kisber said. "This is probably the most important investment they're committed to," he said.

The Volkswagen plant and Hemlock Semiconductor Corp.'s planned solar- panel component plant in Clarksville should generate manufacturing jobs throughout Middle Tennessee, but neither will open until 2011 or later.

As it stands, the state is suffering a deep reduction in manufacturing employment, a loss of more than 12,000 jobs since November 2007.

"When you've invested so heavily in automotive manufacturing and the industry has taken a huge hit, it's going to have a significant impact on the state's economy," said
Ken Currie, director of the center for manufacturing research at Tennessee Tech University in Cookeville.

Currie expects the state to continue to lose manufacturing jobs next year. And when the economy rebounds, manufacturers may hold off on hiring at first and instead invest in new machines or try to squeeze more productivity out of existing staff.

Construction may grow

The construction industry, however, will benefit sooner from the Volkswagen and Hemlock projects. Both are expected to cost $1 billion or more to build, money that will be spread throughout the state starting next year as workers are hired and suppliers tapped.

Such big-ticket projects are seen by many economists as essential to turning the economy around. Gregory Brown, an economist with Martin Methodist College in Pulaski, Tenn., said he expects the recession to bottom out around midyear if President-elect Barack Obama's plan to spend billions on government projects such as roads and schools gets implemented.

The recession has also been hard on homebuilders. For them, the downturn began two years ago, and many in Middle Tennessee, particularly smaller builders, are struggling.

Bruce Hancock, a Nashville builder of luxury homes, said he considers himself fortunate to have two contracts signed to build new homes that will keep him busy through most of 2009. But he also strains under the debt from two homes he built speculatively in 2007, just as the downturn was becoming apparent.

"I knew that we had such a great run in homebuilding that nothing is forever," he said. "I was real good at thinking about it and predicting it, but not good at following my own advice, to be honest."

One benefit to building now is that construction workers and suppliers are plentiful, Hancock said. Builders also say they have begun to see some benefit from mortgage rates that have fallen to nearly 5 percent.

But they want the government to stimulate residential real estate still more. Trade groups for both industries are lobbying the government to buy down mortgage rates and extend tax credits that will encourage home purchases.

"We need something to move buyers off the fence," said John Sheley, executive vice president of the Home Builders Association of Middle Tennessee.

Next month, the local builders association plans to roll out a new tactic to get potential buyers looking. It will begin featuring one home a week on its Web site that will sell at a reduced price. The goal is to entice bargain hunters with deals too good to ignore.

"It's trying to satisfy buyers who are intent that they're only going to buy if it's a steal," said Peggy Krebs, the association's president. "It's a loss leader, but we hope it'll generate more traffic."

Confidence is down

Real estate agents also want the government to take steps to bolster sales in an economy in which many people are afraid to buy lest they lose their jobs.

Such a scenario happened to Leanna Choi, a 26-year-old advertising representative. Two months after buying a condo near downtown Nashville, Choi lost her job as an account executive at the CW Television Network.

The layoff came with little warning. Upon returning to her desk after appointments with potential advertisers last month, she was given 30 minutes to clear out and start looking for new work.

Choi still has the condo and is relying on savings to carry her through until she finds a new job.

"It's been one of the worst years I've ever had," she said. "I'm hoping it won't last longer than another month or two."

Until people become more certain about their jobs, nothing will turn around housing, said David Penn, an economist with Middle Tennessee State University.

"Will (lower interest rates) bring a lot of buyers in? Not if they don't have some confidence that they're going to get an income," Penn said.

As unemployment has spread across the state, reaching levels this fall that hadn't been seen since the 1990-91 recession, even people with jobs have started to worry.

Middle Tennessee State University's latest reading of consumer confidence found that optimism about the economy is essentially nil. State sales tax collections, meanwhile, are expected to fall this year for only the third time since 1968.

"Sales tax is not just retail sales," said Bill Fox, an economist at the University of Tennessee in Knoxville. "It signals a decline both in consumer spending and in business investment."

Consumer wariness has caused some retailers to change the way they do business.

For example, men's apparel store Bachrach has switched from off-the-rack merchandise to selling custom suits in its Green Hills location. The change has let the retailer reduce its inventory and has given some customers a new reason to come into the store.

"Retail was not like it was in the '80s or '90s. People have Internet access. They buy online. You don't have the customers that you used to have walking through your door," said manager Joseph Tetreault. "You have to have a niche."

Health care is pinched

Even in the health-care industry, carving out a niche will be important to survival. While medical care is always in demand regardless of what happens in the economy, people's ability to spend for services is sensitive to downturns.

Some hospitals have been cutting jobs in response to weaker demand for services related to more people being out of work. Hospital chain HCA, for instance, recently cut more than 100 information technology jobs in a move attributed in part to the economic downturn.

But with the baby boomer population aging, specialized services, such as disease management and home health care, are still expected to grow in 2009. And these services depend heavily on nurses.

Many nurses who had left the field are returning, said Colleen Conway-Welch, dean of Vanderbilt University's nursing school. A refresher course that the school offers for those whose licenses had lapsed has drawn 24 enrollees this month.

A total of 36 nurses took the course all of last year.

"It's an imperfect short-term resolution because as soon as the economy stabilizes, those nurses will likely leave the work force again," Conway-Welch said. "They're only working under duress."

Nashville-based CareAll Home Care has hired 197 people in the past three months, including certified nurse technicians or personal sitters and licensed practical nurses, said J.W. Carell, its chief executive. The provider of in-home care hopes to add 500 more people to its current staff of about 1,200.

Helping businesses that are already in the region expand is the centerpiece of the Nashville Area Chamber of Commerce's strategy to weather the recession, said Schulz, the chamber's president.

Relocation plans stall

During the economic expansion from 2001 to 2007, the chamber put a lot of its resources into persuading big businesses, such as Nissan North America and Louisiana-Pacific, to relocate to Middle Tennessee.

But the recession has made major companies reluctant to make such big moves to new cities. So now the chamber is focused more on services such as weekly webcasts, during which small-business owners can seek advice from experts, and business mixers designed to connect owners with local lenders.

"We look at things that are restraints to expansion and try to minimize those restraints," Schulz said.

State economic development officials, meanwhile, say they are not changing their strategy in response to the recession. With Volks wagen and Hemlock on their way in, the officials believe autos, cleaner energy and health care can remain engines of growth for a decade or more.

Not even tighter state budgets brought on by lower tax collections will diminish the commitment to pursuing companies beyond Tennessee's borders.

"I don't see the budget standing in the way of bringing in a good opportunity," said Kisber, the state's economic development commissioner.

The recession should reveal how well the state's efforts to attract new investment have been working, adds TSU economist Ray.

"When times are good, everybody does good," he said. "It's difficult to differentiate between the really good and the not so good. We're kind of doing the separating now. … There cannot be a truth-telling until times really get tough."

For those who have already been bruised by this recession, the question is, how much longer will the tough times last — a few more months, until the end of 2009, or beyond.

Not even the most skilled of economists can answer that question, but all agree the pain will last at least through the winter and into the spring.

For Choi, the advertising representative who lost her job in the fall, the only balm is optimism — faith in the idea that as bad as 2008 has been, next year has to be better. "When you're down, there's nowhere to go but up," she said. "Next year is definitely a new year. Hopefully everything will look up then."

Washington Report: Rate Reduction Proposals
Startups defy sour economy
Autoworkers protest Sen. Corker’s anti-bailout stand
Real Estate Outlook: Affordability Dramatically Improved