Weakened Economy Needs Fed's Helping Hand
Subpar employment gains, lackluster retail sales, and stagnant manufacturing indicators
signal an already weakened economy. Furthermore, rising oil prices and a leveling off of
the housing market have left the average consumer with less discretionary income. Does
this mean that the economy is headed for a recession? The answer is contingent on how
soon the Fed will cut interest rates.
I still see rate cuts coming. 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. If that falls, it has the
potential to take down the rest of the economy if the Fed dithers
in cutting rates.
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 mortgage
sectors. Speaking 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.
Rate cuts, when they happen, 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,
rate cuts will help with loans to the small business sector,
which will prevent the slowdown in consumer spending from
turning into a freefall.
Unlike in the past, Georgia is not immune to
national woes.
Despite a few bright spots such as the small business and
health-care sectors, Georgia’s economy is beginning to lose
momentum, and it will continue to level off as the national
picture worsens.
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 of concern. Meanwhile, the
technology and manufacturing sectors have been in a slump for
a while. 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.
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. |
