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."
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."
Mobile: 678-644-9032 Rajeev Dhawan
Economic Forecasting Center