B a d N e w s f o r I r a q W i l l O v e r r i d e
I n f l a t i o n ; C o n c e r n s C a n D e l a y R a t e
H i k e
-- Rajeev Dhawan
Director of the Robinson College of Business
Economic Forecasting Center
Signs of inflation have fueled expectations that the Federal Reserve will raise interest rates sharply this year. My feeling is that they will raise rates whether it is June or August only if the current rebounding job numbers continue. I predict a slow increase of 250 basis points spread out over the next two and a half years. The rate of inflation has increased, but it was just a year ago that we were worried about deflation. The recovery, especially job growth rebound, is still in its infancy - we've just barely succeeded in "reflating" the economy.
While a pace of 236,000 jobs a month for the last five months is above the new norm of 150,000, the economy needs to create 330,000 jobs per month just to keep the unemployment rate from rising. Greenspan has been using the past few months to look for additional momentum and prepare the market's expectations.
Here are a few more of my predictions as stated at my quarterly economic forecasting conference in May:
- Real GDP will grow by 4.6 percent this year. However, 2005 will not be as strong at 3.4 percent; a similar growth rate of 3.5 percent will be seen again in 2006. The main factor in this moderation is that the Fed will raise rates in late 2004 to prevent overheating.
- Expect inflation to be 2.4 percent in 2004, followed by a 2.2 percent rate in 2005 before dropping to 1.8 percent in 2006. Core inflation will inch up from its 1.5 percent level in 2003 to 1.8 percent in 2004. For the year 2005, core inflation will be 2.3 percent and moderate a bit to 2.0 percent in 2006. On an annual basis, the prediction for the 10-year bond rate is to average 4.7 percent in 2004, rise to 5.4 percent in 2005 and be in the 5.6 percent range by 2006.
- The unemployment rate will drop slightly from its 6.0 percent annual average in 2003 to 5.6 percent in 2004 and stay there in 2005. It will then drop slightly to 5.5 percent in 2006.
- For the year 2004, consumption growth will be a strong 3.9 percent, a sharp rise from the 3.1 percent rate in 2003. By 2005, consumption growth will be down to 2.9 percent and rise mildly to 3.2 percent in 2006.
Regarding the state and local economies, while Georgia has only added 4,100 jobs over the last six months, it is the first time since the recession ended that the state has seen an increase in high-paying jobs. This, combined with an uptick in personal income growth, is a clear sign that the area is headed in the right direction.
This is the first time that job quantity has shown any improvement in close to a year
This is the first time that job quality has shown any improvement in close to a year. Based on a calendar year (January to December), Georgia will add 12,000 high-paying jobs, which is 23 percent of all jobs created in the year. This rate is much healthier than the loss of 38,000 high-paying jobs in 2003.
Personal income in Georgia grew by 4.1 percent in 2003 versus 2.5 percent in 2002. I expect income growth for 2004 to slightly surpass 2003.
However, while these gains are a positive sign that the local economy has gained its footing, it is a far cry from the 7 to 8 percent growth that was consistently recorded in the late 1990s.
One of the factors affecting our recovery is the health of some of our major employers like Delta, Coke, BellSouth and Georgia-Pacific. If you want to know where the main growth engine is, you need to look at smaller firms, especially those in the IT and security sectors as well as public construction projects like Hartsfield's fifth runway and new international terminal. However, reaping rewards from those projects and other road and highway improvements will not begin for another two to three years.
The G-8 Summit helped the Savannah metro area with the influx of people from around the world.
Also from my May report are these numbers:
- 2003 had a modest job loss of 0.2 percent on the heels of a 1.9 percent drop in employment in 2002. For 2004, things will get better with job growth at 1.2 percent, followed by a decent 2 percent growth in 2005 and a respectable 2.4 percent in 2006. Atlanta's growth rate is also in the same league, with growth in 2006 touching 2.8 percent.
- Georgia will gain 51,200 jobs in 2004, and Atlanta will end the year up by 41,900 jobs. Growth will be better in 2005, when 93,100 new jobs will be created in Georgia and 61,900 new jobs will be created in Atlanta. The good news is that by late 2004, the quality of job growth begins to pick up.
- The current (March 2004) seasonally adjusted unemployment rate is 3.6 percent in the state. This is almost a percentage point lower than the 4.9 percent rate seen in March 2003. The annual average will decrease slightly to 4.2 percent in 2004 and will stay at this level through 2005. In 2006, the unemployment rate will inch down again to 4.1 percent. For Atlanta, the unemployment rate - which was 4.7 percent in 2003 - will drop slightly to 4.1 percent for 2004 and 2005. It will then drop again to 4 percent in 2006.
- Total housing permits in 2004 will decline by 7.7 percent. Both single-family and multi-family permits will have a difficult time this year, with single-family permits declining by 5.6 percent and losses coming from multi-family permits at 17.4 percent. In 2005, total permits will decline again by 4.8 percent but will recover in 2006 to post a 2.2 percent growth rate.
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