Rate Cuts Imperfect Cure for Credit Market Blockage; Expect Sub-par Growth Well into 2009, Says Georgia State Forecaster

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."

Highlights from the Economic Forecasting Center's national report:

• Overall, real GDP growth for 2008 will be an anemic 1.1%, recovering slightly to a 1.7% rate in 2009. In 2010, real GDP will grow at a near-trend growth rate of 2.8%.
• The Fed will cut interest rates by another 50 basis points at its next two meetings to bring it to 2.5%. However, by mid-2009 as the economy starts to recover, the FED will begin to "take back its easing." By mid 2010 the federal funds rate reaches 4.5%.
• Consumption growth is expected to be only 1.0% in the first half of 2008 before it improves to a 1.7% growth rate in the second half. For the year 2008, consumption growth will be sub-par 1.6%, a rate that will be seen again in 2009. It will rise by 2.2% in 2010.
• Housing starts will dip below the 1.000 million unit threshold in the coming quarters to average only 0.977 million units in 2008. They gradually recover to be 1.207 million units by 2010.
• For the year 2008, the inflation rate will average 2.5% and then moderate to a 1.6% rate in 2009 as the economy moderates. In 2010, the inflation rate will remain modest at 1.7%. Meanwhile, the core CPI inflation will average 2.3% in 2008, followed by 1.9% in both 2009 and 2010.

Georgia and Atlanta—National Credit Storm Blurs Georgia's Growth Picture

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.

Highlights from the Economic Forecasting Center's local report:

• Georgia's employment on a calendar-year basis will gain 27,900 jobs in 2008, 71,000 jobs in 2009 and 98,100 in 2010. On an annualized basis, Georgia's employment will increase by 0.8% in 2008, 1.2% in 2009 and 2.1% in 2010.
• Georgia's premium jobs ($45,000+), on a calendar-year basis, increased by 500 jobs in 2007. But these jobs will only increase by 1,600 in 2008. In 2009, Georgia will add 13,300 premium jobs and 21,300 in 2010.
• Employment in Atlanta on a calendar-year basis will increase by 19,100 jobs in 2008, 45,400 jobs in 2009 and 66,100 in 2010.
• Atlanta's total housing permits decreased by 34.7% in 2007. Permits will again drop by 18.3% in 2008 but increase by 7.3% in 2009. Permits will increase by 10.2% in 2010.
  All of Georgia's MSAs, except Dalton, will add jobs in 2008 and 2009. The star metro areas will continue to be Savannah, Hinesville, Warner Robins and Brunswick.

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