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August 24, 2005 (Atlanta) - Despite a long list of negative factors such as Iraq, oil prices and the economic malaise in Europe, Dr. Rajeev Dhawan, director of the Economic Forecasting Center at the J. Mack Robinson College of Business, says that the current economy actually earns a solid A- due to high marks in construction, tax collections, real dividend growth, bank loan activity and corporate revenue growth. However, that grade will decrease to a B+ as the economy begins its "orderly moderation" in mid-2006 through mid-2007.
In his latest Forecast of the Nation (August 2005) released today, Dhawan says that while many fear a collapse in the housing bubble could spark a recession in 2006, the answer lies with the Federal Reserve.
"So far, the FED has telegraphed all of its moves well in advance, whereas those on Wall Street keep trying to guess where the FOMC will stop. Looking back at the FED's tenure under Greenspan, the average tightening cycle is two years with rate hikes cumulating 300 basis points. So if you follow this line of thinking, he still has about 50 basis points to go at the minimum. Additionally, I think he will end this cycle with a dramatic flourish of a 50 basis point hike at the December meeting. Furthermore, they will use their jawboning tactics to restrain mortgage lenders to bring about an orderly moderation in housing starts, thus achieving their goal of a soft landing by mid-2006," says Dhawan.
According to the report, while oil prices have been cause for concern, Dhawan expects market forces to cause a drop in global demand which will help moderate prices towards $50 per barrel.
"Both China and the U.S. have seen the largest increase in oil consumption over the past four years. Due to a variety of factors, China has been forced to bid higher on the spot market. This was interpreted as a sustained increase in demand by market participants who in turn bid up prices in the futures market. However, I believe that the moderation within the U.S. combined with China achieving its own goal of 'orderly moderation,' there will be a drop in global demand and the market will self-correct."
Highlights from the Economic Forecasting Center's national report:
- For 2005, real GDP growth will be 3.7% and will slow to a 3.0% rate in 2006 as consumption growth moderates. In 2007, real GDP will post a 2.6% growth rate as residential construction as well as business fixed investment growth moderates.
- In 2005, the economy will add new jobs at a very strong rate of 190,000 per month, helping to decrease the unemployment rate to 5.0%. The unemployment rate will drop further to 4.9% in 2006, before inching up to 5.2% in 2007 as job gains decelerate to 100,000 jobs per month following moderation in GDP growth.
- The 10-year bond rate averaged 4.2% in the second quarter of 2005. However, it is not expected to cross the 5.0% mark until early 2006. The 10-year bond rate will average 4.5% in 2005 and will average 5.2% in 2006. In 2007 it will average 5.5%.
- Inflation will pick up in the coming quarter to 3.9% (from 3.3% in the first half of 2005) but moderate in the fourth quarter to 3.1%. For the year 2005, the inflation rate will average 3.2%. CPI will moderate to 2.6% in 2006 and 1.6% in 2007.
Georgia and Atlanta - Local Growth Suffers a Sectoral Pause
While the U.S. economy has weathered a storm of high oil prices, rate hikes and sufficient job growth, Georgia's economy is suffering from a rise in unemployment and very slow job growth. According to his Forecast of Georgia and Atlanta (August 2005), Dhawan says that despite some positive news in exports, tax collections and tourism, 2005 is a year "better forgotten."
"Overall, the blame for Georgia's growth pause in 2005 can be laid on certain sectors that are either taking a breather or still working out a post-recession business structure. We expect that for the 2005 calendar year only 45,000 plus jobs will be created. However, the good news is that this pause should work itself out by next year and annual growth should return to the more respectable number of 70,000 to 80,000 new jobs by 2006 and 2007."
In addition to the "growth pause" in jobs, Dhawan says that Georgia now has more risk factors than ever before and points to Delta's looming bankruptcy, high oil prices and the completion of several multi-billion dollar projects as other culprits in the state's poor performance.
However, Dhawan sees several "lights at the end of the tunnel" for Georgia as mid 2006 and 2007 approach.
"In addition to a recovery in sectors currently experiencing a job growth pause, we expect tourism to continue to do well with conventions back up to a healthy level and the expected surge in visitors once the Aquarium opens in November," says Dhawan. "Also, the weakened dollar will keep Georgia's exports rolling, and new projects such as the international terminal, new passenger complex, Atlanta's $3.2 billion sewer repair project and the Allen Plaza will show their full impact in construction jobs in 2007."
Highlights from the Economic Forecasting Center's local report:
- For 2005, Georgia employment on a calendar year basis will grow by 1.2%, a gain of 45,770 jobs. In 2006, Georgia will gain jobs at a 2.0% rate or 79,780 jobs. In 2007, Georgia employment will increase 1.8% or 74,280 jobs.
- Georgia's high-paying jobs ($50,000 +), on a calendar year basis, will increase by 3,200 in 2005. In 2006, Georgia will see 5,400 high-paying jobs and 10,340 in 2007.
- Georgia's unemployment rate declined to 4.6% in 2004 from 4.7% in 2003. In 2005 it will rise slightly to 5.0%, but drop to 4.9% for both 2006 and 2007.
- The number of Atlanta's total housing permits increased by 0.3% in the first half of 2005. Permits will decrease by 6.5% in 2005 and by 4.8% in 2006. In 2007, permits will again decline at a rate of 2.6%.
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 |
