November 17, 2004 (ATLANTA) The uncertainty surrounding who will sit in the White House is over and with President Bush back, corporate America and Wall Street are breathing a loud sigh of relief says Dr. Rajeev Dhawan, director of the Economic Forecasting Center at the Robinson College of Business. And according to his latest Forecast of the Nation (November 2004) released today, it appears that while there are "rosy times ahead we're not quite there yet."
"The election has resolved one major uncertainty clouding economic prospects," says Dhawan. "Combined with the fact that public corporations are experiencing double-digit growth in their revenues apart from improved profit margins, makes me more confident for job prospects next year. Based upon my statistical work that causally links job creation to company revenue growth, these large corporations can easily add one million of the two million jobs expected next year!"
But will the higher cost of oil spoil this upbeat forecast?
According to Dhawan, the impact on the economy of increasing oil prices can be seen in two phases – the first-round effects and the second-round effects. In the first round, the overall Consumer Price Index (CPI) will go up in response to the higher cost of living resulting from higher energy prices. Dhawan says this may be painful for consumers in the short-term but not detrimental to the economy.
"The second-round effect impacts the core rate of inflation. That's when companies pass on their increased cost of production which leads to a rise in prices for services and other non-energy goods," explains Dhawan. "However, this time around the second-round effects will be weak or non-existent because as improved technological substitution opportunities stifle the pass-on-the cost desire, and a concomitant rise in core CPI Inflation."
According to the report, a weakened dollar has boosted our exports, but, foreign demand for our "cheaper" products will be negatively affected due to the weakness in the global economy. This is the result of China trying to engineer a slowdown which will impact its Asian suppliers. Meanwhile, in Europe, Germany is suffering from very high unemployment which is negatively affecting that region. All told, this will keep the trade deficit numbers high in coming years.
"However, the high trade deficits keep a lid on our long-term rates which helps the FED in maintaining its measured pace of raising short-term rates next year," says Dhawan. "Expect increases totaling only 150 basis points next year but the long-term rate will remain below 5.5% for the coming years. Thus, the housing market will moderate in an orderly fashion next year."
Highlights from the Economic Forecasting Center's national report:
Real GDP will moderate further to a 2.9% growth rate in the fourth quarter of this year as consumption grows moderately by 2.4%. For 2004 real GDP growth rate will be 4.3%, making it the best year since 1999. However, in 2005 real GDP growth moderates to a respectable 3.2% and the growth rate is a healthy 3.6% in 2006.
In 2003, the overall inflation rate fluctuated between 1% and 4% in response to oil price movements and weakness in aggregate demand. For the year 2004, the inflation rate will average 2.6%; remain at this level in 2005, before moderating to 2.1% in 2006.
Oil prices increased from $26.10 per barrel in 2002 to $31.10 in 2003. In 2004, the situation worsened as crude oil prices escalated above $44 in the third quarter. Overall, in 2004 the price of oil will average $41.90, rise to $44.60 in 2005 and drop to $36.10 by 2006. Oil will remain above $35 for the coming future.
Georgia and Atlanta – Delta's Headwinds Buffet Local Growth Forecast – While revenue growth at most of Georgia's large companies – BellSouth, Coca-Cola, Georgia-Pacific and Sun Trust – has been sluggish at best, the situation at Delta looms large for Georgia's economy says Dhawan in his report, Forecast of Georgia and Atlanta (November 2004).
"While the company may have avoided disaster in the short-term, the concessions are sure to negatively affect the Atlanta area," says Dhawan. "The one billion dollars in pilot concessions translates into approximately $625 million lost in consumer spending for the Atlanta area and a 5% reduction in retail sales in South Metro area. This is a potential loss of 9,000 jobs or 20% of next year's growth."
As for the other powerhouse companies picking up the load for Delta's losses, Dhawan says that it isn't likely.
"Revenue growth, not healthy profit levels, are what really matters," explains Dhawan. "Unless revenues pick up, these corporations will continue to add jobs, if any, at a snail's pace."
On a positive note, small firms are hiring new employees and the housing market continues to prosper as interest rates remain consistently low. In addition, Hartsfield-Jackson's $5.4 billion expansion plan is keeping construction firms busy. Meanwhile, Atlantic Station is helping to revitalize the midtown area and the Georgia Aquarium, set to open in late 2005, is expected to attract two million visitors a year.
Highlights from the Economic Forecasting Center's local report:
Georgia employment decreased by 0.3% for the 2003 calendar year (January to December). For 2004 calendar year, Georgia employment will grow by 0.8%, a gain of 32,700 jobs. In 2005, Georgia will gain jobs at a 1.9% rate or 74,500 jobs. In 2006, Georgia employment will increase by 2.6% or 105,300 jobs.
For the 2004 calendar year, Georgia's high-paying jobs decreased by 38,900 in 2003 but will increase by 39,000 in 2004. In 2005, Georgia will see 12,700 high-paying jobs and 19,300 in 2006.
Georgia's unemployment rate declined to 4.7% in 2003 and will end 2004 at 4%. In 2005 unemployment will rise slightly to 4.2% and stay at that level in 2006.
Atlanta's total housing permits decreased by 2% in 2003 but increased by 14% in the first three quarters of 2004. Permits will rise by 15.8% in 2004 but will drop by 8% in 2005. By 2006, permits will again decrease, although at the slightly lesser rate of 4.5%.
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Media Contacts:
Tammy DeMel
Associate Director, Communications and External Affairs
Robinson College of Business
Phone: 404/413-7078
Cell: 404/702-9743
Dr. Rajeev Dhawan
Director, Economic Forecasting Center
Robinson College of Business
Phone: 404/413-7261
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