Contact:
Gary McKillips, 404-413-7077
J. Mack Robinson College of Business
ATLANTA – The elevated price of oil is the biggest challenge facing the nation’s economic recovery, 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 addresses three stages in which high oil prices impact the economy. In the first stage consumers spend less on discretionary items; in the second, businesses raise prices, resulting in a drop in demand; and in the third stage, the Fed raises interest rates to curb inflation.
That first stage, according to Dhawan, has been somewhat ameliorated by the two percent payroll tax cut that has put about $100 per month in the pocket of the average American. “However,” he notes, “that money has gone to the gas tank and, if gasoline prices linger above $3.50 per gallon, the second stage will begin.”
In the second stage businesses do raise prices resulting in a drop in demand. Dhawan says that airline and other transportation-related industries have been the first movers in this regard by passing on higher fuel prices as surcharges. For example, he adds, “Delta, the world’s largest airline, has already announced capacity cutbacks along with voluntary and early retirement programs because they know the demand for air travel will drop with higher prices.”
Although he thinks a Fed rate increase—the third stage of the oil price impact—is a bad idea, Dhawan will not rule it out if high oil prices ultimately show up in “core” inflation. Core inflation excludes certain volatile items such as food and energy. The forecaster says that if the Fed becomes aggressive in raising rates in this stage, then “a recession could be possible.” He adds, “I hope the Fed learned from the mistake after the oil shock of 1973 when it tightened credit excessively in response to a rise in input prices.”
Dhawan notes that QE3 (a third phase of the federal government’s quantitative easing strategy) is unlikely, but QE2 did contribute to the recent decline in the dollar, “which has helped with our superb export growth.”
Other positive news involves investment in equipment and software, a precursor of private job growth, which has been strong for the past 18 months. However, says the Georgia State forecaster, this investment rate is slowing. As a result, says Dhawan, “the job gains pace will slow in the coming quarters and will be in the 150,000 range per month for the next few years.” Dhawan also notes that the CEO Confidence Index has risen since the 2010 elections. “However,” he adds, “it can turn for the worse with the looming battles in Congress over renewal of the debt ceiling, fiscal cutbacks and entitlement reform.”
Other uncertainties, according to Dhawan, include the status of the Gadhafi regime in Libya and the ability of Japan to recover from its earthquake and nuclear crisis.
Highlights from the Economic Forecasting Center’s National Report
• After growing by 2.9 percent in 2010, real GDP growth will be 2.2 percent in 2011, rising to a 2.5 percent in 2012 and 2.8 percent in 2013
• For 2011, the CPI inflation rate will average 2.9 percent. In 2012, the inflation rate will be 2.4 percent, decreasing to 2.0 percent in 2013. Meanwhile, the core CPI inflation rate will average 1.5 percent in 2011; will rise to 2.1 percent in 2012, and will be 2.0 percent in 2013
• Private fixed investment will grow 6.6 percent in 2011, expanding by 7.0 percent in 2012 and 7.5 percent in 2013
• In 2011, the job creation rate will hover around 150,000 jobs per month or 1.8 million jobs for the year. In 2012 growth will slow to 144,000 jobs per month and again in 2013 to 125,000 per month. The unemployment rate will average 8.9 percent in 2011, 8.6percent in 2012 and 8.1 percent in 2013.
Headwinds Hamper Georgia's Recovery
"Georgia’s nascent economic recovery is facing both global and 'internal' headwinds that portend a moderate growth climate for the remainder of this year and into 2012” Dhawan says.
In his "Forecast of Georgia and Atlanta," Dhawan says that an elevated oil price is the primary reason for “iffy growth” this year. He adds that "a moribund banking sector impairing small business hiring, and a crippled construction industry will cause our prime driver of growth—residential and commercial building—to languish in the coming years." He said these negatives offset the good news about exports, manufacturing, and state tax revenue collections, resulting in almost no job growth in the last six months—a sharp contrast to job growth nationwide. Dhawan says "the fallen home values have caused a shortfall in city and county budgets resulting in municipal layoffs for the first time in recent memory.”
The forecaster notes that the Sunbelt states including Georgia “experienced an influx of people in the 25 years before the onset of the Great Recession in 2008.” He said during that period banks were able to lend liberally therefore making Atlanta the epicenter for small builders putting up five units or less. However, notes Dhawan, after the financial crisis, “this activity practically came to a halt, leaving scores of walking wounded small and community banks.” Added the forecaster, “Even though vacancy rates are falling, multifamily permits are miniscule because of the unavailability of credit. Lack of available credit—not high interest rates— is one economic headwind we will be facing for awhile.”
An example of how the global headwind—the elevated oil price—will affect local companies can be seen in Delta Air Lines, Atlanta’s largest corporate employer and a linchpin for its tourism and convention business. Says the forecaster, “Delta’s increased fuel spending is being passed to the consumer, which will lessen their demand for air travel. Under these circumstances,” he adds, “one cannot envision new hiring in the aviation sector.” Dhawan says that the retail sector also will be affected by rising transportation costs and that service-oriented firms “are not about to hire until they see the white-in-the-eyes of the demand creature.”
Regarding trade, Dhawan notes that “Although export growth has been superb, energy reliant emerging economies, such as China and India, which account for 25 percent of Georgia’s exports, are finding high oil prices a major issue. Both China and India have tightened monetary policy in response to inflation.” Dhawan says that these economies will slow and in turn affect Georgia’s export performance. In addition, says the forecaster, the problems created by the Japanese earthquake will affect China and Korea.
Dhawan concludes that the improvement in tax revenues will continue but moderate as oil takes a bite out of consumer spending. He says healthcare will remain a prime growth driver, with the transportation, warehousing and manufacturing sectors (as related to exports and auto production) continuing to do well.
Highlights from the Economic Forecasting Center’s State and Local Report
• Georgia’s employment growth will remain weak in calendar year 2011 with the addition of 33,200 jobs (9,200 premium jobs). The recovery will be significant for 2012, when Georgia’s economy will add 76,600 jobs (17,900 premium jobs). In 2013, it will add 85,200 jobs (17,800 premium jobs)
• Georgia’s unemployment rate will be 9.8 percent in 2011, 9.1 percent in 2012 and 8.4 percent in 2013
• Atlanta’s employment will increase 21,600 jobs (including 6,600 premium jobs) in 2011. In 2012, expect 52,100 job gains (with 14,000 premium jobs) for the calendar year and in 2013 the employment base will grow further in with an increase of 58,300 jobs (14,100 premium jobs)
• Atlanta’s housing permits will grow by a modest 18.2 percent in 2011, with both single and multifamily permits posting increases of 16.7 percent and 26.6 percent, respectively. Permit activity will increase again by 25.8 percent in 2012; that year, single family permit activity will increase by 24.4 percent, and multifamily permit activity will post a significant 32.7 percentgrowth rate. Permit activity will grow again in 2013, posting an overall increase of 37.4 percent However, permit levels will be only about 15,000, still below 2008 levels
May 25, 2011