Economic Outlook Shows Slower Growth

CHATTANOOGA, Tenn. (WDEF) – Tennessee’s economy is expected to continue growing into 2026, though at a slower pace than in recent years, according to a new report from the Boyd Center for Business and Economic Research at the University of Tennessee, Knoxville.

The 2026 Economic Report to the Governor projects the state’s inflation-adjusted economy will grow about 2% next year. That would be slightly faster than the growth expected in 2025 but below the stronger expansion seen in 2023 and 2024.

Larry Kessler, a research associate professor at the University of Tennessee and project director at the Boyd Center, said recent gains in consumer spending have not been felt evenly across all income levels.

“A lot of the spending growth has been driven by higher income households or as consumption spending by like middle income household and lower income it’s like just kind of keep pace with where it was prior to the pandemic and I think everyday Tennesseans are kind of seeing that or feeling that when they whether they go to the grocery store or pay their electric bill that affordability is becoming a major issue,” Kessler said.

The report also shows job growth in Tennessee has cooled, though employment levels continue to rise. Consumer spending has remained steady, helping support continued economic expansion.

When asked about the possibility of a recession, Kessler said slower growth could increase the state’s vulnerability to economic shocks.

“I think it gets worrisome when you get to like sub one or even one and a half percent growth because then any kind of stumble or negative shock can lead to negative growth and could potentially lead to a recession,” he said.

The Boyd Center also points to risks tied to federal policy changes, including international trade and tariffs, that could impact future growth.

Kessler said labor supply is another factor that could influence the outlook.

“The main channel that I see it through is labor supply that if there’s more people being deported and fewer people, um, international people moving into the country there’s just going to be fewer people working, fewer people spending money here in Tennessee or in the U.S., both of which could be a drag on economic growth,” Kessler said.

Despite those risks, researchers say Tennessee’s economy is still expected to grow in 2026, though at a slower and more uncertain pace than in recent years.