vol. XVII no. 4

				E c o n o m i c   S u p e r t a n k e r   W i l l   S u r v i v e S q u a l l s     -- Rajeev Dhawan       Director of the Robinson College of Business       Economic Forecasting Center Interest rate hikes, high oil prices and the rising value of trade deficits do not appear to be a match for the U.S. economy. While these signs would normally be cause for concern, the nation's economy is similar to a supertanker which has the ability to survive these types of squalls over the ocean. It's been interesting how, after eight interest rate hikes, the 10-year bond rate has remained fairly steady. Greenspan himself has admitted that this is somewhat of a conundrum. This curious relationship, however, is a direct result of the major Asian Central Banks wanting to hold U.S. treasuries in order to keep their currencies from appreciating against the dollar. If they allow this to happen they would lose their competitiveness when exporting to the major buyer for their products, namely the U.S. While oil prices have not dampened consumer behavior in the U.S., it has been a negative for the Asian economies. Countries like India and China are still energy inefficient when compared to the West, and the energy bill will take a bite out of their growth. China is already slowing down, India's moderation is around the corner and in Europe, the U.K. is waging a war against inflated home prices. But the biggest drag on European growth prospects is Germany. Despite the troubles abroad, I am still cautiously optimistic on the domestic front. Highlights from the Economic Forecasting Center's national report: For 2005, real GDP growth will be 3.3% and will moderate to 3.1% in 2006 as consumption growth moderates. In 2007, real GDP expands again by 3.3% as export growth is a respectable 9.8%. In 2005, the economy will add new jobs at a decent rate of 180,000 per month, and this will help decrease the unemployment rate to 5.2%. In 2006, the economy will adds jobs at the rate of 156,000 and the unemployment rate will stay at the 5.2% level. The 10-year bond rate averaged 4.3% in the first quarter of 2005, but is not expected to cross the 5.0% mark until early 2006. The 10-year bond rate will average 4.5% in 2005, rise to 5.2% in 2006 and average 5.4% in 2007. Net-net, the 10-year bond rate will not cross the 6.0% mark to cause upheaval in the mortgage market The CPI inflation rate in the first quarter of 2005 was 2.4%. In the coming quarter, it will pick up to 3.2% but moderate in the second half to average 2.8% for the year. In addition, the Federal Funds rate was raised to 3% at the last FED meeting in May and will rise to the 4% level by the end of 2005. Georgia Economy: A Solid B with A+ Variables Georgia's super-hot construction sector, the recovering tourism and convention business and increases in state tax collections are just a few of the A+ variables in Georgia's economic picture. However, tempering the good news are the uncertainties within the telecom sector, Delta's looming bankruptcy and a continued decline in manufacturing. Added together, GeorgiaÕs economic prospects earn a solid "B." Most of the improvements experienced by the national economy have trickled down to Georgia. For example, Georgia's construction sector has benefited from low interest rates and the low dollar has helped Georgia's exports. However, for every positive there seems to be a negative which, at least for the short-term, is keeping Georgia from a truly healthy and stable economy. Georgia's transportation sector is one area for concern. While higher oil prices may not be fazing consumers, they have hurt Delta, with jet fuel running 16% higher than expected. However, there is still plenty to be happy about and most of the good news surrounds job growth. Since Spring 2004, state tax collections have been running 8.4% higher than the previous fiscal year with the most notable increases in personal income tax collections up 10% year-to-date. Any increase usually means more people have been hired. In addition, because 2006 is a gubernatorial election year, the state budget for fiscal year 2006 includes an additional 1 billion dollars in spending which will most likely create new jobs at the various state agencies. Finally, Georgia's commercial construction projects also continue to serve as a bright spot in the overall economic health of the area, which will contribute handsomely to Georgia's bottom line. Highlights from the Economic Forecasting Center's local report: For 2005, Georgia employment will grow by 1.9%, a gain of 73,730 jobs. In 2006, Georgia will gain jobs at a rate of 2.1% or 85,070 jobs. In 2007, Georgia employment will increase by 2.0% or 82,620 jobs. Georgia's high-paying jobs ($50,000 +) will increase by 6,400 in 2005. In 2006, the state will see 8,360 new high-paying jobs and 12,560 in 2007. Specifically, professional and business services will increase 3.4% in 2005 and 4.6% in 2006 and 2007. Education and health services will increase by 3% in 2005 and 3.4% in 2006 and 2007. Georgia's unemployment rate declined to 4.6% in 2004 and will rise slightly to 4.9% in 2005, but drop to 4.8% for both 2006 and 2007. The number of AtlantaÕs total housing permits decreased by 9.6% in the first quarter of 2005. Permits will decrease by 12% in 2005 and by 2.3% in 2006. In 2007, permits will again decline at a rate of 2.5%. For more information on Rajeev and the activities of the Economic Forecasting Center go to www.robinson.gsu.edu/efc/index.html. To provide feedback on this or other articles from Rajeev, email him at forecast@gsu.edu Top

Office of Communications and External Affairs
Robinson College of Business,
Atlanta, Georgia 30303
Tel: 404-413-7080; Fax: 404-413-7076; E-mail: External Affairs

Copyright © 2005 Robinson College of Business/Georgia State University.