U.S. Economy: Fed to Use Rate Cuts to Navigate the Tricky Art of a Soft Landing Says Georgia State University Forecaster

February 21, 2007 (Atlanta, GA) – While there are clear signs of moderation, several risk factors have the economy in dangerous waters. According to Dr. Rajeev Dhawan, director of the Economic Forecasting Center in his latest Forecast of the Nation (February 2007), the economy is currently experiencing the early stages of a soft landing.  Risks that include a further decline in consumption growth, an inverted yield curve, skittish CEOs and a possible disruption in the oil supply could turn things from good to bad.

While the fourth quarter appeared to show signs of good news - a 3.5% real GDP growth, 4.4% consumption growth, monthly payroll job growth numbers revised up over the last few months, and a report of a stabilized housing market by the FOMC at it's January meeting - Dhawan said that these numbers were based on one-time events that are unlikely to be repeated.

" Much of the good news in the fourth quarter had to do with the sharp 20% drop in gasoline prices in September and stronger new home sales. But there's no sign of gas taking another 20% plunge and new home sales are not expected to maintain this upward trend, " said Dhawan. "Therefore, growth in 2007 will be dicey, especially in the first half of the year."  In order to prevent the economy from spiraling out of control, Dhawan says that the Fed will start cutting rates by early summer. "I'm looking for a total of 75-basis points which will ensure a normal year of growth in 2008."

The big story, however, is moderation in consumption and its effect on corporate investment.

"We saw a glimpse of consumers pulling back a little bit from their free wheeling spending ways last fall. With home price appreciation stalling in most parts of the country, a wealth-induced pullback in spending is not an academic exercise anymore," he said. "It's a matter of when, not if, with the only debate being the strength of this wealth. Whatever the outcome, the risk factor of a consumer-induced pullback in corporate investment desire is highly elevated."

Highlights from the Economic Forecasting Center's national report:

• For 2007, real GDP growth will be 2.6% and will accelerate a bit to a 2.8% rate in 2008. In 2009, real GDP will post an even better 2.9% growth rate. However, most of the time the economy will be at or below the trend growth rate of 3.0% as consumption moderates substantially.
• Total consumption growth is expected to be 2.7% in the first quarter of 2007, which is quite a pullback from the 4.4% growth rate in the fourth quarter of 2006. For the year 2007, consumption growth will still be a decent 2.9% before moderating to 2.7% in 2008 and to 2.6% in 2009.
• On an annual basis, housing starts will average 1.482 million units in 2007 and will recover to 1.542 million units in 2008. Housing starts will rise again to 1.643 million units in 2009.
  For 2007, oil prices will average $57.70 per barrel, decrease slightly to $53.40 in 2008 and rise to $58.30 in 2009.
• The core CPI inflation rate will ease from its 2.5% level in 2006 to 2.0% in 2007. In 2008, it will average 1.8% and rise to 2.0% in 2009. 
• On an annual basis, the 10-year bond rate will average 5.0% in 2007 and will rise to the 5.3% range in 2008. In 2009, it will average 5.5%, a modest increase from the preceding year.

Georgia and Atlanta - Ongoing Slowdown Will Yield to a Normal 2008 

Georgia's economic grade drops from an A-  to a B+ as several sectors start to feel the impact of the slowing economic engine. According to Dhawan in his Forecast of Georgia and Atlanta also released today, this trend will continue into 2007, making for a subdued job creation rate.

"We began seeing the first signs of a slowdown in the later half of 2006. While it is true that Georgia created 80,100 jobs last year, only 28,700 of those jobs were generated in the second half of the year," he said. "Fortunately, the pullback that we will experience in 2007 will be short-lived and better job growth will return to Georgia in 2008 and continue in 2009."

According to the report, most sectors will "hold steady" this year before ramping up again in 2008 as the economy starts to show clearer signs of growth. However, three major sectors - financial services, healthcare, and information - will continue to show consistent hiring levels in contrast to the overall economy.
In addition to a slowdown in jobs, Georgia's housing market has also showed signs of weakness except for an "unusual surge" in multifamily housing permits due to the popularity of in-town condos.

"Despite strong growth in multifamily permits, single family housing permits took such a hit in the second half of the year that it affected Atlanta's overall housing permit totals which ended the year down by 5.2%," said Dhawan. "As the industry saw that the Fed was not lowering interest rates anytime soon and housing prices across the nation stalled, many developers shelved their plans to begin new housing developments."

Overall, however, Dhawan says that Georgia's economy is on solid ground.
"We won't experience a surge in jobs this year but despite some of the economic curve balls that have whizzed our way lately, our resilience proves that Georgia's foundation is strong."

Highlights from the Economic Forecasting Center's local report:

• Georgia's employment level will grow by 65,600 jobs in 2007. In 2008, Georgia will gain 97,600 jobs. In 2009, Georgia employment will increase by 94,500 jobs. On an annualized basis, Georgia's employment will increase by 1.5% in 2007, 2.0% in 2008, and 2.3% in 2009.
• Georgia's premium jobs ($45,000 +), on a calendar year basis, increased by 8,900 in 2006 and will increase by 14,200 in 2007. In 2008, Georgia will see 16,200 high-paying jobs and 19,100 in 2009.
• Employment in Atlanta on a calendar year basis is expected to gain 48,200 jobs in 2007, create 67,300 additional jobs in 2008 and 63,500 jobs in 2009.
• The number of Atlanta's total housing permits decreased by 5.2% in 2006. Permits will decrease by 16.2% in 2007, by 1.1% in 2008 but increase by 5.9% in 2009.

 

Mobile: 678-644-9032 Rajeev Dhawan
Economic Forecasting Center
Mobile: 404-867-2286