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