Feb. 24, 2010
Gary McKillips, 404-413-7077
Robinson College of Business
ATLANTA - With the banking system still struggling with toxic debt on its balance sheets and the corporate sector still reluctant to invest, the economic recovery-especially job growth-is expected to continue at a much slower rate than many think, said Dr. Rajeev Dhawan, director of the Economic Forecasting Center at Georgia State University's J. Mack Robinson College of Business.
In his Forecast for the Nation released today, Dhawan said that "previous sharp recoveries were accompanied by a strong recovery in jobs-one that is notably absent at present as investment spending, a leading indicator of job growth, continues to be weak."
The Georgia State University forecaster said that consumers, burdened by prolonged unemployment, seem "to open their wallets only when price incentives or outright gifts, such as cash for clunkers, are thrown at them. But," cautioned Dhawan, "government spending will only add to our mounting national debt and cannot possibly lead to substantial job growth, as corporate spending is the only solution."
Businesses - large and small - are continuing to play it safe because, said Dhawan, "investing is a risky journey. Companies are extremely concerned that their new investments do not guarantee future sales." This lack of what Dhawan terms "an effective demand signal" is a major stumbling block to recovery.
He also said that, notwithstanding the administration's mandate to lend more, banks simply lack the collective ability to do so because of toxic debt on their balance sheets. Dhawan feels that the U.S. will not go the way of Japan which experienced 10 years of zero growth. Unlike the U.S., Japan did not have foreign investors buying its toxic debt, resulting in "zombie" banks that were unable to support the corporate sector's investment plans. "The faster we clean up these bad banks, the faster we can get back on track with respect to growth." However, Dhawan noted, "this will still be a long process."
According to Dhawan the latest GDP report provides a glimmer of hope, with tech spending increasing by a strong 13.3% in the fourth quarter of 2009 compared to the previous quarter's increase of 1.5%. "But," he added, "the hole is a lot deeper if you look at it in historical context. Tech investment levels have dropped more than 20% since their peak in late 2007."
Highlights from the Economic Center's National Report
Banking Woes Impede Georgia's Job Recovery
Marked by significant job losses, a double-digit drop in tax collections over the last twelve months and an upward trend in foreclosures, Georgia's economy continues to struggle to find the necessary momentum for a full economic recovery.
In his Forecast of Georgia and Atlanta, released today, Georgia State University Economic Forecasting Center Director Rajeev Dhawan said that toxic debt in the banking system continues to impede the planned expansion desires of companies, particularly small businesses.
The overhang of toxic debt has caused banks to be very cautious in making new loans. In addition to the 33 Georgia banks that have failed since 2007, Dhawan noted that "more than two-thirds of the surviving banks in Georgia have some sort of cease-and-desist order against them." Construction activity and small business start-ups are major casualties of this toxic debt.
Dhawan also said that consumer reluctance to spend and unpopular initiatives out of Congress are among the factors causing businesses to back away from plans to invest and expand. He noted that in the early 2000s approximately 50,000 people annually moved to Georgia from neighboring states. "This," said Dhawan, "reinforced the economy by creating a multiplier effect that led to the establishment of new businesses, services and buildings to support this growing population base. Now," he said, "the situation has reversed. The market cues are all focused on contraction. Clearly revenue collections (especially sales tax collections) continue to fall significantly at the state level."
The Georgia State University forecaster said that in addition to construction, the other traditional sectors of growth-air transportation and telecom-also are in a retrenchment. He said that the healthcare sector will grow but be restrained somewhat "while it watches for cues from Washington." Education and state and local government, also drivers of job growth, will continue to suffer from lack of tax revenue," said Dhawan.
Highlights from the Economic Forecasting Center's Local Report