Nov. 17, 2010
Gary McKillips, 404-413-7077
J. Mack Robinson College of Business
ATLANTA – The new normal in the nation’s economy is the abnormal and we have to “make peace with it,” said Rajeev Dhawan, director of the Economic Forecasting Center at Georgia State University’s J. Mack Robinson College of Business.
In his quarterly Forecast of the Nation, Dhawan said the new normal features a real GDP growth that is far below the annual growth rates experienced from the mid ’90s through the mid-2000’s and is marked by “myriad issues including depressed home values, ballooning entitlements, a divided politic and a shaky banking system.”
Another abnormality the country will be living with, said Dhawan, stems from adoption of the second phase of the Fed’s quantitative easing, or QE2, strategy of buying treasury bonds, or “printing money” as Dhawan called it. Although it did “spark a stock market rally, which was the intended effect, it also resulted in a simultaneous drop in the dollar.”
Dhawan said the QE 2 strategy will help the economy indirectly by raising inflation expectations which will boost the equity market. Furthermore a weak dollar will boost exports, especially to emerging markets. These factors, said the forecaster, will hopefully increase CEO confidence, which will be the key to investment and job creation.
“When CEOs feel optimistic and confident, they tend to lobby and convince their boards that the situation is right to expand the scale of operations,” said Dhawan. He noted that the “CEO Confidence Index is up sharply from its nadir in late 2008. Because of this we saw job growth in 2010, but the investment driving that growth was primarily to replace obsolete equipment – not for new additions. As a result,” he added, “I don’t think the 15 percent plus tech investment rate that is necessary to accelerate job growth can be attained in the face of fiscal uncertainty and political gridlock in Washington.”
Dhawan said that before investing “corporate chieftains and consumers, too, need to know what their future tax liabilities will be in order to calculate internal rates of return on investment – and planned consumption.”
Dhawan said to expect gains in manufacturing (high tech, aviation and capital goods) and agriculture. He added that a weak dollar should make U.S. commercial real estate less expensive and thus more attractive to foreign investors.
Highlights from the Economic Forecasting Center’s National Report
– Overall, real GDP growth for 2010 will be 2.7 percent, decelerating sharply to 2.1 percent in 2011. In 2012, real GDP will grow at a slightly better rate of 2.6 percent. For all of 2010 consumption expenditures will rise by only 1.7 percent, followed by a 2.2 percet rate in 2011 and 2012.
– For the entire year, the CPI inflation rate will average 1.7 percent. In 2011, the inflation rate will be 1.6 percent, increasing to 2.0 percent in 2012. Meanwhile, the core CPI inflation rate will average 1.0 percent in 2010, followed by a moderate 1.3 percent rate in 2011 and 1.7 percent in 2012.
– Private fixed investment will grow 5.9 percent in 2010, expanding at a much stronger 8.7 percent in 2011.
– In 2011, the job creation rate will hover around 127,000 jobs per month as economic growth remains subdued. The situation will improve slightly in 2012 with the addition of 140,000 jobs per month. Although moderating, the unemployment rate will remain above 9 percent for the next two years.
“New Pitch” Required for Georgia, Atlanta Rebound
Georgia and Atlanta must “look for a new pitch” in order to escape the malaise of the national economic slowdown, Dhawan said.
In his Forecast of Georgia and Atlanta, Dhawan said that, “The Federal Reserve is about to embark on the second round of its quantitative easing (QE) strategy. In layman’s terms, QE involves printing money to buy up assets, notably long-term treasuries, purportedly to boost the economy.
"However,” added Dhawan, “The state and local area have no such option. Therefore the region must look for a new way – a new pitch – to boost job growth which is the key to long-term economic recovery. People tend to blame globalization and free trade for the current malaise in the economy that has made available cheap imports, mainly from China, to consumers shopping at Walmart and other discount superstores”
He also said that the communications revolution and inexpensive air travel have contributed to lowering the competition barriers.
“But,” noted the forecaster, “more than anything else, it is the lack of business spending on equipment and software in the recent decade that has hampered national growth.”
This, he added, is a direct result of the level of unease demonstrated in the CEO Confidence Index, which has fallen over the last six months as concerns remain regarding consumer spending power and political gridlock in Washington.
“This means that the 15 percent plus tech investment rate needed to accelerate job growth cannot be attained," he said.
Dhawan noted that the state and local Atlanta area must “roll with the punches” as they relate to these national trends.
But he did foresee one positive, “The Fed’s QE policy will lead to a weaker dollar. Since Georgia relies on exports, the weaker dollar will boost exports particularly toward emerging economies.”
For years Georgia and Atlanta could rely on their many assets, said Dhawan. These include the Savannah port, Hartsfield-Jackson Airport and the interstate transportation corridor – all of which boosted the real estate sector.
“Now this model has changed with competition from cities like Charlotte and Nashville and the negative publicity Atlanta receives related to traffic, water problems and Georgia’s troubled banking system,” he said.
Concluded Dhawan, “It’s time for this area to focus on more manufacturing, seizing export opportunities and courting foreign companies looking to expand."
Highlights from the Economic Forecasting Center’s Local Report
– Georgia’s employment gains were negative during the first six months of 2010. Employment will increase slightly in the second half of the year, but even with the slight pickup, the state will create only 1,200 jobs for the calendar year (January to December). The pickup will still be somewhat modest in 2011 when Georgia’s economy posts 57,300 jobs for the calendar year (including 13,000 premium job gains). Job growth will continue at a stronger pace for calendar year 2012 with the creation of 80,600 jobs (including 17,100 premium job gains).
– Georgia’s unemployment rate will rise significantly from 9.6 percent in 2009 to 10.2 percent in 2010. In 2011, unemployment will slightly decrease to 9.7 percent. In 2012, it will decline further to 9.2 percent.
– Atlanta’s employment will post modest increases for calendar year 2010 of 7,000 jobs (including 1,200 premium jobs) and 2011 (44,800 job gains including 10,900 premium jobs). Expect an increase in employment of 55,500 jobs (12,800 premium jobs) in calendar year 2012.
– Atlanta’s housing permits will grow by a strong 26.3 percent in 2010, with both single and multifamily permits posting significant increases. Permit activity will again increase by 25.2 percent in 2011, and 57.5 percent in 2012. However, permit levels will be about 15,600, less than one-quarter of those in 2006.