February 27, 2008 - (ATLANTA, GA) - The subprime-fueled credit crisis combined with record-high oil and falling home prices has ignited the recession debate. In an attempt to combat the fallout, the FED finally has taken aggressive rate cut measures. But according to Dr. Rajeev Dhawan, director of the Economic Forecasting Center at the Robinson College of Business, while these and expected cuts will help prevent an outright recession, they will be unable to fully unfreeze the credit market, which is where the nation's biggest problem lies. As a consequence, sub-par GDP growth is expected until mid-2009 with normalcy returning only by 2010.
"The FED has done what it can and now the ball is in the lenders' court, more precisely their mindset. That mindset is directly a function of a deteriorated balance sheet and the expectation of what's to come," said Dhawan in his Forecast of the Nation, released today. "This expectation is the key to the whole credit problem. At present, lenders are more worried about potential future losses, not just what they have written off. Consequently, they will be super-cautious in their 'new' lending decisions affecting growth prospects longer than expected."
Meanwhile, outstanding debt in the asset-backed commercial paper market is down by almost 40 percent since the credit crisis began last August. In addition, the spread between AA and A2 bonds in this market has risen sharply, too. Since then, each time the spread appears to shrink back to normalcy following Fed cuts, it shoots back up on the announcement of bad financial news, especially the write-downs at major Wall Street banks.
"This spread is my best indicator for how much stress exists in the credit markets," said Dhawan. "I need this spread below 10 basis points for a sustained period of time before I can pronounce this problem to be over for good."
But even after the credit crisis subsides, Dhawan warns of other potential pitfalls.
"Consumer confidence has been holding up better than expected despite falling home and rising gas prices," said Dhawan. "However, as it falls further it will affect an already weakening CEO confidence, resulting in a pull-back on investment growth and job creation in the economy."
But despite the gloom, Dhawan remains cautiously optimistic that the nation will begin to see the light at the end of the tunnel by mid-2009.
"Bad debt will get written down and work its way through the balance sheet of the system, and Fed rate cuts will help in this process by providing liquidity to undertake the write-downs," he said. "For now, the only solution is time."
In the past, Georgia's economic engine has kept it ahead of the national curve; however, the combination of the credit crisis, corporate cutbacks and the rise in gas prices, which has begun to cut into discretionary spending, will prove to be too much to keep the state's economy from sliding, says Dhawan in his Forecast for Georgia and Atlanta.
"Georgia's payroll growth rate of 1.6% in December 2007 was higher than the 0.8% national rate. However, Georgia's job growth in the last quarter of 2007 was half of what was experienced in the third quarter," said Dhawan. "Hospitality, which performed better than expected, will not be able to maintain the momentum due to the national slowdown. In addition, growth in the health care sector, which is experiencing some uncertainty due to the pressures of the presidential race, will be unable to make up for the shortfalls in the rest of the economy."
The uncertainty at Delta, announced cutbacks, and hiring freezes at The Home Depot and UPS add to Georgia's woes and make it difficult for the area to combat the national headwinds. Just like the national picture, Georgia will have to wait for the smoke to clear before seeing positive signs in mid-2009.
The job outlook weighs heavily in particular on the outlook for premium job growth.
"For the 2008 calendar year, Georgia's job creation pace will be only 27,900 jobs. Of these jobs, only 6%, or 1,600, will be in the premium category. In 2009, that number will jump to 13,300, but we will have to wait until 2010 to see numbers anywhere close to what we experienced during the go-go '90s," he said.
Mobile: 678-644-9032 Rajeev Dhawan
Economic Forecasting Center