Credit Aftershocks Damage Nation’s Growth Prospects; Oil Holds the Key to Fed’s Next Move, Says Georgia State Forecaster

The aftershocks from the credit crisis which continue to spread to other sectors have not only put the economy into a recessionary state but also have damaged its growth prospects until 2010, according to Dr. Rajeev Dhawan, director of the Economic Forecasting Center at Georgia State University. In his Forecast of the Nation, released today, Dhawan warns that any additional uptick in oil prices could put the economy further at risk and recovery further away.

“Despite all of the aftershocks from the credit fallout, oil has been the wild card testing the Fed’s patience,” he said. “If the price of oil does not retreat below $100 per barrel by October on a sustained basis, worries of inflation will cause the Fed to raise rates much earlier than expected.”

Dhawan expects the price of oil will drop to an average of $89 per barrel in the fourth quarter of 2008 allowing the Fed to hold off on rate hikes until next spring. However, he anticipates that the Fed will be somewhat aggressive raising the federal funds rate by 250 basis points by mid-2010.

“The Fed hikes will begin even before growth catches its stride which is a departure from the norm,” he said. “But rather than waiting until job growth picks up to normal levels, the Fed will hike the federal funds rate to show it is serious about containing inflation.”

While Dhawan says that the Fed will be able to stave off inflation, he cautions that the fragile health of the banks will cause the economy to recover at a slow rate.

“Despite efforts by the Fed and the Treasury to help bail out the financial industry, lenders still need to keep liquidity or cash on hand to deal with charge-offs that they will have to take as loans continue to go sour,” he said. “Still, some banks are on the brink of failure and it will be up to the FDIC to bail them out and should they run short of funds, look for the government to bail out the FDIC leaving taxpayers with the tab. Thus my forecast calls for an anemic recovery in 2009 and a below potential growth in 2010.”

Highlights from the Economic Forecasting Center's National Report:
The GDP growth fails to cross the 2.0% mark until late-2009. Overall, real GDP growth for 2008 will be 1.4%, decelerating to a 0.5% rate in 2009. In 2010, real GDP will grow by 2.2%, still below the trend rate of 3.0%.
For 2008, consumption growth will be 1.0%, before moderating to 0.3% in 2009. It will rise by 1.9% in 2010. Durable goods consumption will decline by 2.8% in 2008 and 3.7% in 2009, before experiencing a sharp 3.9% rise in 2010.
For the year 2008, oil prices will average $106.7 per barrel, before moderating to just below $90.0 per barrel in 2009 and 2010.
Housing starts will average 0.949 million units in 2008 and will drop to 0.900 million units in 2009. Housing starts will rise to 1.209 million units in 2010.
For 2008, the inflation rate will average 4.3% but will moderate sharply to a 2.2% rate in 2009. In 2010, the inflation rate will average 2.0%. Meanwhile, the core CPI inflation rate will average 2.3% in 2008 and 2009, before rising mildly to 2.4% in 2010.
The unemployment rate will average 5.5% in 2008, but it will rise to 6.3% in 2009, dropping slightly to 6.2% in 2010.

Georgia and Atlanta—Georgia’s Boat Tied to National Woes

Georgia’s job picture continues to look bleak despite gains in education, healthcare, and government jobs during the second quarter of 2008. According to Dhawan, the problem stems from the housing downturn which has had a negative ripple effect throughout Georgia’s economy. Additionally, high gas prices and the credit crisis have added to the area’s problems and, like the national economy, Georgia’s growth prospects will not return until 2010.

In his Forecast of Georgia and Atlanta, Dhawan says that Georgia’s residential and commercial real estate sector continues to show signs of weakness which not only impacts construction jobs but has spread to supporting sector jobs as well. While future construction growth depends on what the economy’s growth warrants, it is also a function of credit market conditions.

“Ultimately, it is the willingness of the banking sector to make new construction loans that makes future construction activity possible. The ability to finance construction in turn depends on the quality of the bank’s balance sheet,” says Dhawan. “Unfortunately, Georgia has been hard hit by the credit crisis with a proportion of unprofitable lending institutions currently at 25%, almost double the national rate.”

In addition, high gas prices are negatively impacting consumer spending and are wreaking havoc with Delta, the area’s largest employer, which has already announced major cutbacks in routes and jobs.

Net-net, says Dhawan, the prognosis for Georgia’s growth in the coming quarters is bleak. The question is when can the area expect to see job growth return?

“I expect job losses to continue at a somewhat heavy rate for the rest of the year and anticipate a net loss of 35,300 jobs for calendar year 2008,” he said. “In 2009, we’ll see the decline slow to 2,600 losses before the recovery strengthens in 2010 where we can expect to see 61,700 new jobs.”

However, he cautions, “Like the national picture, this forecast assumes that oil prices moderate below $100 per barrel by late October and stay low.”

Highlights from the Economic Forecasting Center's Local Report:
For calendar year 2008, we anticipate 35,300 net losses (14,600 premium jobs). In 2009, 13,900 job losses are expected in the first half of the year, followed by 11,300 job gains in the second half, making for 2,600 job losses (11,000 premium jobs losses). The recovery will strengthen in 2010 when 61,700 jobs will be created (12,000 premium jobs).

Atlanta’s employment growth will remain negative for the remainder of 2008 for a total loss of 20,600 jobs (8,000 premium job losses). For calendar year 2009, Atlanta will post 3,900 job gains, but 4,100 premium job losses. The recovery will strengthen in 2010 when 44,200 jobs are created (10,200 premium job gains).

Atlanta's total housing permits will plummet by posting a 52.1% drop in 2008 after a 34.6% decline in 2007. Permit activity will again decrease at a slower rate of 5.0% in 2009 but will inch up in 2010, posting an 18.4% increase.

Most MSAs in Georgia will exhibit slower employment growth in 2008, with Albany, Columbus, Dalton, and Macon observing job losses. Only Savannah, Gainesville and Warner Robins will see any increase in employment in 2008, though increases will average below 1.0%.

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