Any Eventual Recovery at the National Level Hinges on Quick and Proper Financial Rescue Plan, Says Georgia State Forecaster

February 25, 2009 - (ATLANTA) - Despite the passage of the economic stimulus bill, the recession will continue to deepen until there is a detailed plan to fix the nation's banking system, says Dr. Rajeev Dhawan, director of the Economic Forecasting Center at Georgia State University, in his Forecast of the Nation, released today.

According to Dhawan, the plan recently unveiled by the Treasury has some good elements but execution and specifics, especially as it relates to transparency, will be the key to protecting the economy from any further turmoil.

"The stimulus plan is not the cure for treating our economic woes as we probably won't see any positive impact until mid-2010 and 2011," says Dhawan. "In order for any stimulus to work, we first need to clear the banking system of toxic debt which is the only thing that will encourage credit to flow and corporate America to start investing again."

According to Dhawan, corporate leaders have stepped back and are taking a deep look at all aspects of their operations. "This reset is far from a simple matter of flipping a switch on the circuit breaker," he explains. "Rather, it is a mindset that takes time and improvements in credit availability to change."

So when will that change take place and how much longer will the recession last?

"By the GDP growth metric, the recession will technically end in mid-2010 when the numbers finally turn positive and the job loss rate is practically zero," says Dhawan. "In total, the current recession will be the longest one in postwar history, lasting about 30 months, almost as long as the period of double-dip recession in the early 1980s."

Highlights from the Economic Forecasting Center's National Report:

• Real GDP will decline at a 3.0% rate in 2009, and will decline again, albeit at a milder rate of 0.2% in 2010. In 2011, real GDP will grow by a subpar 1.8%. Growth will not be anywhere close to the 3.0% trend line until after 2012.
• Consumption will decline by 2.2% in 2009 but recover only mildly to a positive 0.2% growth in 2010. Thus, consumption in this recession will decline for six consecutive quarters.
• In the first half of 2009, the economy will continue to shed almost half a million jobs per month. This job loss rate will moderate to 250,000 per month in the second half of 2009. In 2010, the economy will finally show signs of recovery with monthly gains of 15,000 jobs. This rate will improve substantially to 75,000 jobs per month in 2011. The peak unemployment rate in this recession will be at 10.3%, with total job losses of more than 4.5 million jobs since December 2007.

Georgia and Atlanta – Corporate Pullback Deepens Georgia's Recession

A sharp rise in unemployment and foreclosures, an increase in bank failures and a plunge in the housing market has bled Georgia's economy dry, says Dhawan. But things will get worse before they get better as the reset in the corporate sector will deepen Georgia's recession and delay any significant job recovery until 2011.

"During the ongoing mayhem in the credit markets, the corporate sector threw in the towel," says Dhawan in his Forecast for Georgia and Atlanta, also released today. "Now, corporations are in what I call a self-preservation mode which involves drastic, cost-cutting maneuvers including increased layoffs and an unwillingness to invest."

According to Dhawan, this corporate reset has far-reaching negative implications for the local economy including a continued rise in unemployment and a sharp deterioration of one of Georgia's economic engines – the hospitality sector.

Adding to the area's troubles are the number of banks in Georgia that are failing.

"One of the state's biggest problems is that bank balance sheets in Georgia are becoming more fragile. Six banks already have failed in the state in the past 12 months, and numerous others have cease-and-desist orders issued against them by the FDIC," says Dhawan. "This is why Georgians should pay close attention to the Treasury's plan for solving the banking issue."

In addition, the state continues to see an increase in foreclosures and a decline in tax revenue.

"The finances of state and local governments are taking a big hit with the double whammy of falling retail sales and property tax collections which has led to layoff announcements from various municipal entities and school boards," said Dhawan. "Unfortunately, the portion of the recently approved stimulus bill directed towards bolstering state finances will temper but not eliminate this decline." He added, "The trouble is even more severe at the city and county government levels as property tax revenues will decline sharply in the coming years. The stimulus proposal offers nothing to alleviate the declining revenue situation which is already leading to cutbacks."

Net-net, Dhawan says that the prognosis for Georgia's growth in the coming 12 to 18 months is bleak.

"The recovery will begin in 2011 as stimulus programs and credit repairs undertaken by the government kick in. But the recovery will be somewhat tepid as credit market operations continue to remain well below their highs."

Highlights from the Economic Forecasting Center's Local Report:

• Georgia's employment growth will be negative for the next two years. After losing 89,600 in calendar year 2008, Georgia will lose another 143,100 jobs (54,000 premium job losses) in 2009. In calendar year 2010, the state will lose another 24,400 jobs (17,100 premium jobs losses). The recovery will be modest in 2011 when 44,200 jobs will be created (7,100 premium job gains).
• Georgia's unemployment rate will significantly increase to 9.0% in 2009 from 6.8% in 2008. In 2010, it will increase further to 10.3% and then slightly rise to 10.5% in 2011.
• Atlanta's employment growth will remain negative for a total loss of 92,200 jobs in calendar year 2009 (37,600 premium job losses). In the first half of 2010, 10,200 job losses are expected with a mild recovery happening during the second half of 2010 when 400 jobs will be created. In all, 2010 will post 9,800 job losses [8,600 premium job losses].The recovery will strengthen somewhat in 2011 when 34,000 jobs are created (with 6,000 premium job gains.)
• Atlanta's total housing permits will plummet again in 2009 by 37.4% after a 57.6% decline in 2008. Permit activity will experience a boost in 2010, posting a 7.1% increase. It will again increase by 17.7% in 2011.

Dr. Rajeev Dhawan, director
Economic Forecasting Center
Robinson College of Business
Mobile: 404-867-2286