Half-speed ahead: economy faces investment and financing headwinds

Feb. 24, 2010

Contact:
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

• Real GDP growth for 2010 will be 2.7%, decelerating slightly to a 2.3% rate in 2011.  In 2012, real GDP will grow at a somewhat improved rate of 2.5%. The fiscal deficit this year is expected to be 10.6% of GDP, and will still be a high 6.9% of GDP in 2012. Thus, the 10-year bond rate will be 4.0% in 2010, and increase to 5.7% in 2012.
• Consumer spending after growing 2.5% in the opening quarter of 2010 will moderate to 2.0% by year-end.  Personal consumption growth will average 2.0% in the 2010 to 2012 period.
• Job growth in 2010 will be lackluster, and the unemployment rate will stay around 10.0%. In 2011, only 70,000 jobs will be added per month and in 2012 that number will reach 100,000 per month.
• Private fixed investment is expected to dip by 1.0% in 2010 before making a positive 4.2% comeback in 2011. Investment will post a strong 9.0% growth rate in 2012.

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

• Georgia's employment growth will be negative until the end of 2010.  After losing 194,500 jobs in calendar year 2009 (from 2008q4 to 2009q4), the state will lose another 35,600 jobs (17,200 premium job losses) in 2010.  In the 2011 calendar year, expect a moderate recovery in employment activity with 43,200 new jobs added (including 6,000 premium jobs).  The recovery will again be modest in calendar year 2012 when 66,700 jobs will be created (with 10,400 premium job gains).
• Georgia's unemployment rate will significantly increase to 10.3% in 2010 from 9.7% in 2009.  In 2011, unemployment will slightly decrease to 10.0%.  In 2012, it will decrease further to 9.7%.
• Atlanta's employment declined by 5.2%, or 116,500 job losses, in calendar year 2009.  In 2010, growth will remain negative for a total loss of 27,800 jobs (including 13,900 premium job losses).  Looking forward, expect an increase in employment 24,400 jobs (4,700 premium jobs) in calendar year 2011.  The recovery will again be moderate in calendar year 2012 when 48,000 jobs will be created (with 8,800 premium job gains).
• Atlanta's housing permits will increase in 2010 by a moderate 15.6%, following a 66.5% decline in 2009.  Permit activity will increase again in 2011 by 21.6%.  Permit activity will experience a boost in 2012, posting an overall 39.1% increase.  However, permit levels will still be 12,000, or 20%, of the average levels seen between 2001 and 2006.