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November 15, 2006 (Atlanta, GA) – A significant inversion of the yield curve since July 2006 have many worried that the economy is headed for a recession. However, Dr. Rajeev Dhawan, director of the Economic Forecasting Center, says that he sees numerous signs in the economy that signals the Fed will start cutting the interest rate in March 2007 for a total of 75 basis points by mid-2007 to help keep the current economic moderation from morphing into a recession or even a prolonged period of sub-par growth.
According to his latest Forecast of the Nation, released today, Dhawan admits that the upside-down yield curve is a serious cause for concern. "An inverted yield curve usually signals that there is a weakness in the economy and recessions almost always occur whenever the yield curve is inverted substantially for a certain length of time. This was the case before the 1973 recession, the double-dip Volcker recessions in the 1980s and as recently as in 2001."
"There are three additional reasons why the Fed will begin easing rates soon. First, they have just about achieved their goal of moderating runaway housing activity. Housing starts are now much closer to the sustainable 1.6 million unit pace and the direction for new and existing home sales is clearly downward," said Dhawan. "Second, is the decrease in the price of oil. And finally, consumption growth has been slowly inching its way down from the strong 3.9% rate we saw in 2004 to a pace of about 2.8% over the last six months. The idea is to get that number just a little below 2.5% for a while but not crush it into oblivion while fighting the mild inflation problem we currently are experiencing."
Dhawan believes that cutting interest rates will help correct emerging financial imbalances in the economy. But warns that if oil climbs back to $70 per barrel or housing starts creep towards the 2 million unit level again, "then the Fed will be forced back into the game."
Fortunately, he believes that the chances of these two events happening are very remote.
Highlights from the Economic Forecasting Center's national report:
- Overall, for 2006, real GDP growth will be 3.2% but will slow to a 2.1% rate in 2007. In 2008, real GDP will post a 2.8% growth rate. From a healthy 3.1% growth rate in 2006, consumption moderates to 2.5% range in 2007 and 2008.
- On an annual basis, housing starts will average 1.831 million units in 2006 and drop to below 1.600 million units in 2007 and 2008 as effective mortgage rate remains above 6.0%.
- For 2006, oil prices will average $66.40, moderate to $58.00 in 2007 and drop slightly to $54.90 by 2008.
- The core CPI inflation rate will inch up from its 2.2% level in 2005 to 2.5% in 2006. In 2007, it will average 2.2% and will moderate to 1.9% in 2008.
- The 10-year bond rate will average 4.8% in 2006 and rise to 4.9% in 2007. In 2008, it will average 5.1%, a modest rise from the preceding year. In this entire forecast period, the 10-year bond rate is note expected to cross the 55% mark.
Georgia and Atlanta – Hospitals, Hotels, Insurance Offer Best Job Opportunities as Georgia's Economy Continues to Slow - Currently, Georgia's economy is holding on but will slowdown over the next few years, keeping in synch with the national economy, says Dhawan in his Forecast of Georgia and Atlanta also released today. Despite the slowdown, he says there are still bright spots for Georgia's job seekers in several key industries.
"Georgia has created 92,000 jobs in 2005 but the pace in 2006 is slower -- only 72,800 in the last 12 months," says Dhawan. "Going forward, sectors like healthcare, tourism and retail will still add jobs in the next few years, but the pace will be slower." He added that there are certain sub sectors within each of those industries that show particular promise for employment including hotels, arts, entertainment and recreation, hospitals, insurance, trucking, and scientific jobs.
Another bright spot for Georgia is the continued growth in cities such as Warner Robins, Brunswick, and Savannah, which according to the forecast, will outpace the state's 2.1% growth and post job increases of 3.5%, 3.3% and 3.2, respectively.
In addition to the jobs outlook, Dhawan says that the housing market will continue to moderate all across the country but for Georgia the pain will not be quite as bad.
"Home prices in Georgia never skyrocketed very high so consequently they won't fall as much either. But local builders of single-family homes are getting spooked by the national indicators and in Atlanta, single-family permits have decreased by 5.5% since January and will end the year down by 9.5%," he said. "However, Atlanta is unique because of the surge in condo projects which have increased multifamily permits by 16.8% so far this year and will finish 2006 up by 14.3%." Dhawan says that the increase in condo projects has also had a positive effect on Georgia's construction and engineering sectors.
Highlights from the Economic Forecasting Center's local report:
- Georgia's employment level will grow by 82,200 jobs in 2006. In 2007, Georgia will gain 61,100 jobs. In 2008, Georgia employment will increase by 82,600 jobs. In terms of growth rates, GeorgiaÕs employment will increase by 2.1% in 2006, 1.5% in 2007, and 1.8% in 2008.
- Georgia's premium jobs ($45,000 +), on a calendar year basis, increased by 10,300 in 2005 and will increase by 9,500 in 2006. In 2007, Georgia will see 5,800 high-paying jobs and 10,300 in 2008.
- Employment in Atlanta on a calendar year basis is expected to gain 54,700 jobs in 2006, create 43,500 additional jobs in 2007 and 58,600 jobs in 2008.
- The number of Atlanta's total housing permits decreased by 3.1% in 2005. Permits will decrease by 5.7% in 2006 and by 10.6% in 2007. In 2008, permits will again decrease by 3.1%.
Media Contacts:
Tammy DeMel
Associate Director, Communications and External Affairs
Robinson College of Business
Phone: 404/413-7078
Cell: 404/702-9743
Dr. Rajeev Dhawan
Director, Economic Forecasting Center
Robinson College of Business
Phone: 404/413-7261
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