Gary McKillips, 404-413-7077
J. Mack Robinson College of Business
ATLANTA – Recent stock market volatility, political dysfunction, European debt jitters and slowing growth in emerging markets will cause already decelerating GDP growth to stall in the next 12 months, says Rajeev Dhawan, director of the Economic Forecasting Center at Georgia State University’s J. Mack Robinson College of Business. He notes that “we will even see negative real GDP growth and consumption in the third quarter of this year, though we may technically avoid a recession.”
In his quarterly Forecast of the Nation, Dhawan says “the problem today is a lack of business confidence that is depressing investment, which in turn is leading to reduced job growth and a concomitant reduction in the consumer’s purchasing power.”
Already this spring the CEO Confidence Index, which recovered sharply after last November’s elections and held steady in the first quarter of 2011, has dropped by five points as the result of global events such as the turmoil in Egypt, the Libyan uprising, and the Japanese tsunami. Dhawan says “The current political dysfunction in Washington and stock market gyrations will further negatively impact the mood of CEOs, which will cause a reduction in investment expenditures.” He adds that, “It will also send a signal to small businesses, which take cues about expansion from the big corporate sector and consumer spending trends.”
The forecaster says that small businesses constitute 50 percent of the employment base and although “they don’t pontificate in the boardrooms, they do listen to the jingle of the cash register.” To that end, notes Dhawan, “Core retail sales—that is, sales excluding the volatile component of gas and motor vehicles—are still growing, but at only half the rate they were in the spring. This rate,” he says, "will be hard to sustain as real wage growth in this recovery has been abysmal.”
On the Standard & Poor’s credit downgrade, the Georgia State forecaster calls it “unfortunate, but not surprising after the recent theatrics in Washington.” He adds, however, that the downgrade coupled with ongoing stock market volatility has spooked the Fed into pledging a moratorium on a rate hike for the next two years. Dhawan adds that, “this promise, by definition, means that growth will be lousy over that period of time.”
Adding to these woes are the European debt problems that began in Greece, spread to Italy and Spain in late July, and continue to ripple throughout the European continent, where growth has now stalled in Germany and France. In addition, emerging economies, led by China, are slowing as they combat their inflationary pressures.
How bad will things be in the next 12 months? According to Dhawan, growth will slow from 0.8 percent in the first half of this year to 0.4 percent in the second. It will rise to 1.5 percent in 2012. In summary says the forecaster, “the economy is running on empty and it shows.”
Highlights from the Economic Forecasting Center’s National Report:
• Following an anemic 0.8% growth rate in the first half of 2011, real GDP will contract 0.3% in the third quarter of 2011, rebound in the fourth quarter by 1.2%. For all of 2011, real GDP growth will be 1.3%, rising to a 1.5% in 2012 and to 2.4% in 2013.
• As the economy stalls expect oil prices to settle around $85 per barrel for the coming quarters. Vehicle sales will be a subpar 12.2 million units in 2011, barely improving to 12.6 million in 2012.
• After adding about one million jobs in the first seven months of 2011, the economy will add only about 250,000 in the last five. In 2012, the economy will add 80,000 jobs per month; 100,000 per month in 2013. Unemployment will remain above 9% in 2012 and 2013.
• In 2011, the CPI inflation will be 2.8%, moderating to 0.9% in 2012 before rising to 1.9% in 2013. Core CPI inflation will remain below 2% and the 10-year bond rate will average about 3% in 2011 and 2012.
Georgia: Hostage to Prevailing Conditions…and Then Some:
The impact of a diminished corporate confidence is felt not only at the national level but also in Atlanta and throughout the state of Georgia, which is causing a reduction in investment expenditures and curbing small business expansion and consumer spending—a cascading set of circumstances, each of which feeds the others, according to Dhawan,
But the sting is even sharper in Georgia. Year-over-year job growth rate of an abysmal negative 0.6 percent in June is in sharp contrast to the positive 0.8 percent job growth at the national level, a situation that has Dhawan proclaiming, “We need some relief in Georgia, and, if I may add, quickly.”
In his quarterly Forecast of Georgia and Atlanta, Dhawan says that, “The urgency comes from the fact that lack of job growth stemming from lack of confidence in the private and corporate realm has immediate negative implications for the local economy involving vehicle sales and home values among others.”
Dhawan asserts that in order to see strong job growth in Atlanta and throughout the Peach State a few years in the future, “there must be a credible arrest in the decline of home values and it must happen now.” With Atlanta metro area home prices currently at 2000 levels, the forecaster noted that “since houses are used as collateral for small business startups and expansion, a decline in home prices is tied to the paucity of job creation which unfortunately is also hostage to deteriorating global conditions.”
For example, the impact of high oil prices on consumer purchases and travel has left Atlanta’s largest corporate employer, Delta, no choice but to scale back significantly. The carrier has announced plans to do just that starting this fall. Although the carrier’s latest profit and revenue growths were decent, advance booking numbers are weak. “What matters for expansion are future forecasts,” says Dhawan, “and company leaders don’t like what they are seeing and experiencing.” As a bellwether, Delta’s move signals negative news to Atlanta’s important hospitality sector as well.
One beacon of growth: Georgia exports have grown at a double-digit rate, in sync with national numbers. The state’s exports to China and other emerging markets such as Turkey, Brazil and the Middle East also have grown dramatically. But Georgia’s No. 2 export destination, China, is trying to slow its economy in order to curtail inflation; and the rest of the world economy is slowing as well. As a result, says Dhawan, “We will see less demand for our products in the coming months from China and from around the globe.”
Highlights from the Economic Forecasting Center’s Report for Georgia and Atlanta:
• Georgia employment grew by only 4,000 in calendar year 2010; and it will barely be positive in 2011 as the state will add only 3,200 jobs during the current calendar year. The job addition will be better in 2012 when the state adds 46,500 jobs—10,900 of which will be premium jobs—for an annual job growth rate of 0.9%. In 2013, the recovery will be better when the economy adds 75,000 jobs, for an annual job growth rate of 1.7%. Of that number, 16,000 will be premium jobs.
• Georgia unemployment will remain at 9.9% in 2011, which is slightly lower than the 10.2 percent rate seen in 2010. In 2012, unemployment will decline mildly to 9.3%. It will decline again in 2013 to 8.8%.
• Metro Atlanta employment will be weak in the coming years. After creating only 1,000 jobs in calendar year 2010, Atlanta will lose 2,300 jobs in calendar 2011 (0.5% annual decline). For calendar year 2012, Atlanta’s economy will create 32,600 jobs (with 8,000 premium jobs). In 2013, expect 51,400 job gains (with 12,200 premium jobs) for the calendar year, making a significant 1.9% annual growth rate. Atlanta’s employment base will be 2.3 million workers, about the levels in 2005.
• Metro Atlanta housing permits grew by 16.8% in 2010 but will decline by 5.8% in 2011 as single family permits decline by 9.5%. However, multifamily housing permits will grow by 14.8% in 2011. Permit activity will increase by 11.6% in 2012, and rise again by 20.3% in 2013. However, permits levels will be roughly 9,000, which is roughly one-eighth of levels seen in 2004.
Aug. 24, 2011