Where’s the Recession?

Economic graphs

Where's the Recession?

Although local finance officials remain cautious, the long-warned-of downturn has yet to arrive.

by jesse fox mayshark • September 13, 2023

Economic graphs

Knox County Commissioner Larsen Jay asked a question during last month’s meeting of Commission’s Finance Committee that has been on the mind of many professional and casual observers of the economy in recent months: Where’s the downturn?

Tennessee has benefited economically from recent population growth.

“Everything continues to be these reports that say, ‘The recession is literally right around the corner,’” Jay said to Chris Caldwell, the county’s chief financial officer. “For 24 months — ‘It’s almost here, it’s almost here.’ Sometimes it’s a ‘soft landing,’ sometimes it’s right around the corner.”

He concluded, “There seems to be this imbalance all the time between doom and gloom and what people are actually doing.”

“I think that’s a great question,” Caldwell replied. He added, “A lot of this just doesn’t make sense right now.”

It was a localization of a conversation that has been taking place among economists, financial forecasters and public officials nationwide. “Recession or soft landing?” asked a headline in Forbes last month.

The most recent estimate from the Congressional Budget Office, released in June, forecasts that growth in the gross domestic product (GDP) will slow to 0.4 percent in the second half of 2023 and then rise to 1.5 percent in 2024 and 2.5 percent in 2025. But it is not forecasting negative numbers in GDP, which is one of the key indicators of a recession.

Caldwell noted that one widely followed recession risk dashboard, compiled by ClearBridge Investments, is still showing a strong risk of a recession as of its most recent update at the end of July. Of 12 indicators it tracks, 10 are pointing toward recession and two toward “caution.” None are predicting economic expansion.

And yet, he said, the county’s own revenues have held up and continue to run ahead of budget expectations — though not by nearly as much as they did during the pandemic-fueled consumer binge of the last few years.

“It’s starting to flatten out, but it’s still not flat,” Caldwell said.

Larry Kessler, a research associate professor at the Boyd Center for Business and Economic Research in the University of Tennessee’s Haslam College of Business, said that economic activity both in Tennessee and nationwide has held up even in the face of inflation and rising interest rates.

“The economy has just been even stronger this year than people expected,” he said.

Kessler leads a team at the Boyd Center that is charged with putting together an economic forecast for the governor every year. In their 2023 outlook, they projected that even if the nation did dip into recession, Tennessee would fare better than most states.

“A lot of it was because there's just been so many people that have moved into Tennessee over the last couple of years,” he said, “and that’s just led to a ton of additional economic activity — more people working and more people spending money.”

Like the rest of the Southeastern U.S., Tennessee has seen big jumps in net migration over the past two years, with people moving here from other parts of the country. According to Census Bureau estimates, the state gained a net 81,000 new residents in 2022, which the Tennessee State Data Center said was almost certainly an all-time record increase.

More significant at the national level, Kessler said, is the ongoing labor shortage across nearly all sectors of the economy. That has kept unemployment low and has pushed wages higher as employers try to attract workers.

In more normal times, the combination of inflation and the interest rate hikes enacted to combat it would prompt a rise in unemployment because of falling consumer spending and companies freezing hiring or laying off workers. 

But Kessler said the pandemic appears to have fundamentally reshaped the labor market, prompting many people to accelerate plans to leave the workforce altogether. A shift that might have played out over five to 10 years as Baby Boomers reached retirement age was compressed into just a few years.

“It's certainly led to a lot of opportunities for younger workers who were perhaps working in lower-wage jobs and were trying to shift to other industries,” Kessler said. “So now there's a ton of job openings and higher-paid jobs because of Baby Boomers retiring.”

Tennessee tends to have a lower unemployment rate than the nation as a whole, and Knox County tends to have a lower unemployment rate than the state because of the stability of several institutional employers — the University of Tennessee, Oak Ridge National Laboratory, the Tennessee Valley Authority and Knox County Schools chief among them.

The result is that even as talk of a looming recession has circulated, this July the state hit its lowest unemployment rate ever recorded — 3.1 percent. That was also Knox County’s rate in July, after dipping all the way to the nearly inconceivable number of 2.1 percent in April. Functionally, unemployment rates that low mean just about anyone looking for a job can find one, albeit not always the job they want.

Caldwell said that for local governments, the picture is increasingly looking like one in which revenues moderate without plunging the way they tend to do in a recession — the “soft landing” that economists have begun talking about with increasing confidence in the last six months. But he defended his department’s budgetary caution in trying to size up an unpredictable economy.

“I would always rather take a semi-conservative approach to budgeting and have money at the end of the year where we can come back and say, ‘OK, what are some projects that we wish we could have done that we can do now — and best part is, pay cash for?’” he said.

Kessler said that as he and his team begin to assemble their outlook for 2024, they will probably take a similarly careful approach.

“As of now, I think we would call for kind of a continuation of moderate but positive growth in the economy for Tennessee,” he said.