Weakened Economy Needs the Fed's Helping Hand Sooner Rather Than Later Says Georgia State University Forecaster

May 23, 2007 (Atlanta, GA) – Sub-par employment gains, lack-luster retail sales, and stagnant manufacturing indicators signal an already weakened economy. Furthermore, rising oil prices and a leveling-off of the housing market has left the average consumer with less discretionary income. Does this mean that the economy is headed for a recession? According to Dr. Rajeev Dhawan, director of the Economic Forecasting Center in his latest Forecast of the Nation (May 2007), the answer is contingent upon how soon the Fed will cut interest rates.

"My forecast is for the Fed to cut interest rates by a total of 75-basis points this summer," says Dhawan. "However, with so many risks and dangers out there, especially a less than stellar housing market, the question looming overhead is how much of household wealth is tied to 'the housing boat'? If the answer is 'a lot' then we are in for some rocky seas because that impacts the first domino - consumer consumption – and if that falls, it has the potential to take down the rest of the economy if the Fed dithers in cutting rates."

According to Dhawan, one of the biggest dangers is the subprime issue that has been at the forefront of the mortgage market.

"If the subprime issue seeps into the working of credit markets, the effect will be felt far beyond the housing and the mortgage sectors," warns Dhawan. "Speaking of about a domino effect, if lenders pull back on loans it will cause a credit crunch, bringing home sales to a grinding halt. As liquidity dries up in the housing market, it will affect consumer spending. If that goes down significantly enough, the corporate sector will back away from production and then the issue spills into the employment sector. All together the net result is a recession."

Despite the doom and gloom, Dhawan says that he is confident that the summer rate cuts will prevent the economy from spiraling into a recession. "The cuts will not make banks more willing to offer 'new' mortgage loans to borrowers who are looking to refinance, especially in the subprime market. However, it will help with loans to the small business sector, which will prevent the slowdown in consumer spending from turning into a free fall."

Highlights from the Economic Forecasting Center's national report:

• For 2007, real GDP growth will be 1.9% and will accelerate to a 2.8% rate in 2008. In 2009, real GDP will post an even better 3.1% growth rate. However, most of the time the economy will be at or below the trend growth rate of 3.0% as consumption finally moderates.
• Total consumption growth is expected to be 2.1% in the second quarter of 2007, which is a substantial moderation from the robust 3.8% growth rate in the first quarter. For the year 2007, consumption growth will be a healthy 3.0% before moderating to a 2.5% growth rate in 2008 and then rising a bit to 2.7% in 2009.
• On a yearly basis, housing starts will average 1.471 million units in 2007 and will recover to 1.553 million units in 2008. Housing starts will rise again to 1.614 million units in 2009.
  For 2007, oil prices will average $58.00 per barrel, rise slightly to $60.90 in 2008 and then to $61.70 in 2009.
• The core CPI inflation rate will ease fr om its 2.5% level in 2006 to 2.2% in 2007. In 2008, it will average 1.9% before rising to 2.1% in 2009.
• On an annual basis, the 10-year bond rate will average 4.7% in 2007 and will rise to a 4.9% range in 2008. In 2009, it will average 5.2%, a modest increase from the preceding year.

Georgia and Atlanta – Unlike the Past, Georgia Not Immune to National Woes 

Despite a few bright spots such as the small business and healthcare sectors, Georgia's economy is beginning to lose momentum and it will continue to level off as the national picture worsens, says Dhawan in his Forecast of Georgia and Atlanta .

"There are several areas that have been doing well but we are beginning to see a shift downward. Areas such as hospitality and the business service sectors are areas of concern. Meanwhile, the technology and manufacturing sectors have been in a slump for a while," says Dhawan. "Overall, the employment picture is staying consistent with my February forecast. In 2007, we will see a slight drop in job creation but in 2008, job growth will begin to come back and that momentum will continue into 2009."

Similar to the national economy, Georgia faces risks from the housing market.

"While we are fortunate that the state's default rate on home loans, especially in the subprime market, is below the national average, we've still seen a steady rise in foreclosures," says Dhawan. "It's obvious, just as it is on the national level, that the damage has begun and only time will tell how much bigger it will get and how much of an impact it will be on the region. This is undoubtedly the biggest risk factor for the local and state forecast."

Highlights from the Economic Forecasting Center's local report:

• Georgia's employment on a calendar year basis will gain 55,200 jobs in 2007, 80,600 jobs in 2008, and 90,100 in 2009. On an annualized basis, Georgia's employment will increase by 1.3% in 2007, 1.6% in 2008 and 2.1% in 2009.
• Georgia's premium jobs ($45,000 +), on a calendar year basis, decreased by 500 jobs in 2006 but will increase by 5,100 in 2007. In 2008, Georgia will add 14,300 premium jobs and 19,900 in 2009.
• Employment in Atlanta on a calendar year basis is expected to increase by 40,900 jobs in 2007, add 57,000 jobs in 2008 and increase by 63,100 in 2009.
• Atlanta's total housing permits decreased by 5.2% in 2006. Permits will drop sharply by 21.3% in 2007, but increase by 3.1% in 2008 and increase 6.1% in 2009.
   

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