Stable home prices key to thwarting deflation, double-dip recession

Deflation and an ensuing double-dip recession can be avoided if recently stabilized home prices don’t fall again, said Rajeev Dhawan, director of the Economic Forecasting Center at Georgia State University’s J. Mack Robinson College of Business.

In his quarterly Forecast of the Nation, released today, Dhawan said that the “D” word (deflation) is being heard more frequently because of factors such as the slowing of private job creation, yo-yoing retail sales, falling core CPI inflation (inflation excluding food and energy costs), and a rapidly falling 10-year bond yield, now below three percent.

“Consequently,” said Dhawan, “what happens to home prices over the next few months will be critical to consumer confidence. It will affect their spending decisions, especially for big ticket items. This, in turn, will send a signal to CEOs about whether or not to ramp up investment and hiring plans, which then will determine potential consumer income growth and, ultimately, the next round of spending.”

The importance of home price stability is also evident from the fact that one-third of the CPI Index derives from housing or shelter costs. Said Dhawan, “If we take shelter costs out of the core, there is no deflation. Hence, if home prices plunge again, spending power will be sapped, resulting in further price declines that will manifest as deflation leading to a double-dip recession.”

The good news, said Dhawan, is that the growth rate of investment in equipment and software, a precursor of job growth, has been in double digits for the past nine months. Sustaining that pace will depend, said the forecaster, “upon what happens with the currently polarized political atmosphere, costly unpopular reforms and high fiscal deficits causing uncertainty over the tax structure in coming years.

“Still,” Dhawan concluded, “the expectation that housing prices will rise only about 10 percent over the next five years (according to the July MacroMarkets home price survey) has kept consumer confidence flat, illustrating again why home prices are so critical to future growth.”

Highlights from the Economic Forecasting Center’s National Report

Real GDP growth in 2010 will be 2.8 percent for the year. Due to a rollback in government spending and subdued spending by consumers, it will decelerate sharply to 1.9 percent in 2011. In 2012, the real GDP will grow at an improved rate of 2.7 percent. Consumption growth will remain subpar throughout the forecast period, barely reaching 2.2 percent in 2012.
Inflation will be 0.8 percent in the second half of 2010, 1.3 percent in 2011, and will increase to 2.1 percent in 2012. Rate hikes will be on hold until late 2011. At that point the Fed will be aggressive with hikes, quickly raising the target rate to 3.0 percent by mid-2012, as core inflation gets closer to 2.0 percent.
Expect the 10-year bond rate to rise in the coming months to make for an average of 3.4 percent in 2010. It will rise further to 3.9 percent in 2011 and to 4.5 percent in 2012. The fiscal deficit will be 10.0 percent of GDP in 2010, moderating to 6.5 percent in 2012.
After growing by 14.3 percent in 2010, investment in equipment and software will decelerate to 10.1 percent in 2011. In 2012, the category will expand by 10.7 percent. Job growth will increase from the current pace of 100,000 in 2011 to 130,000 in 2012. Unemployment will remain consistently above 9.0 percent.
Georgia and Atlanta to Exhibit Quasi-Growth Prospects
Dhawan said that swings in the national economy, a cautious corporate sector and tempered consumer spending due to weakened prospects for increases in property values will lead to “quasi-growth” prospects locally.

In his Forecast of Georgia and Atlanta released today, he said that factors that reducing income potential going forward include yo-yoing retail sales, weak consumer confidence affecting business investment, and a lack of credit, particularly for smaller-sized corporations, due to continued fallout from the subprime crisis.

“The inability of banks to make loans continues to hamper construction at all levels,” said Dhawan, who added, “Big value projects are missing from the local growth picture. The same is true on the residential side, where many small developers are gone due to an inability to sell unfinished homes.” At the current permitting rate of about 6,000 annually, Atlanta has enough developed lots to build for the next 20 years, he said.

Despite this, housing permits have risen sharply in the last six months, “but only,” said Dhawan, “because people are doing major renovations rather than developers building big multi-family projects. Even with that,” he said, “actual permit levels are one-tenth of what they were at their peak in 2006.”

Things are not much better when it comes to government, which was hit hard in 2008. State government has seen some growth in collections due to a rebound in spending and tighter controls. At the county and city levels, however, the drop in home values has led to sharp declines in collections.

“The corporate sector,” said Dhawan, “has added jobs nationally in the last six months, but growth at the local level has been minimal.” In Georgia the sector has been aided somewhat by the opening of the Kia plant in West Point, the building of a new facility by NCR and, to a lesser extent, planned development of green-tech jobs.

Dhawan said to look for job gains in Atlanta to number only 3,700 for calendar year 2010. Job gains will rise substantially to 46,300 (including 13,800 premium jobs) in 2011 and 55,300 (14,300 premium jobs) by 2012. Unemployment rate, however, still remains above 9.0 percent even in 2012.

Highlights from the Economic Forecasting Center’s Local Report

Georgia will gain only 5,000 jobs in calendar year 2010. In the 2011 calendar year, the recovery pace will pick up somewhat with the creation of 60,300 jobs (including 18,100 premium jobs). Job growth will be stronger in calendar year 2012; 78,300 jobs will be created (with 17,200 premium job gains).
By year’s end, Georgia's unemployment rate will have increased modestly by 0.6 points to 10.2 percent. In 2011, unemployment will decrease slightly to 9.7 percent. In 2012, it will decrease further to 9.2 percent.
Atlanta's housing permits will increase in 2010 by a strong 39.9 percent, with both single and multi-family permits posting significant increases. Permit activity increases by 28.9 percent in 2011 and will grow by a robust 47.1 percent in 2012.
Nominal personal income in Georgia will rise by 3.0 percent in 2010, followed by an increase of 4.1 percent in 2011 and a decent increase of 4.8 percent in 2012. Georgia’s total tax collections are expected to increase by 3.5 percent in FY11, followed by another rise of 5.0 percent in FY12.

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No “Real” Recovery Until Late 2010 says Georgia State University

No “real” recovery until late 2010; credit market volatility leads to slowdown in spending and increased corporate job losses says Georgia State University forecaster

The current volatility in the credit markets has spawned a weakened economic climate (including a recession) that will last through late 2010 and will ultimately change the definition of normal growth for the foreseeable future, according to Dr. Rajeev Dhawan, director of the Economic Forecasting Center at Georgia State.

In his Forecast of the Nation, released today, Dhawan said that even though growth will technically turn positive in the third quarter of 2009, the economy will still experience a somewhat large number of job losses in the second half of next year. From mid-2009 to mid-2010, the economy will grow at an anemic rate of 1% improving slightly to 1.9% in the second half of 2010. But, the growth rate will remain far below its potential of 3%, and it will be 2011 before the economy experiences a “proper recovery”.

“This recession is much more severe than projected in our August report. So far, we have lost a million jobs and I expect we will lose two million more within the next 12 months,” said Dhawan who compares the severity of this recession to what we experienced in 2001.

“Each recession is unique but what’s different between the modern recessions and those that occurred in the 70s, 80s, and even 90s is the negative impact on corporate jobs. Unlike earlier recessions, the corporate job loss rate in 2001 was 4.8% or one-third of the total jobs lost which made for a very severe corporate recession,” he said. “This time around we’re looking at a corporate job loss rate of 5.6%, which will again make up one-third of the total job losses.”

The ongoing job losses combined with a dramatic fall in stock and home prices and the volatility in the credit market has put the squeeze on consumers who have responded by putting the brakes on spending.

“The decrease in consumption is the culprit for the subpar growth performance in my current forecast,” said Dhawan. “That’s why we’re seeing the Treasury’s Troubled Asset Relief Plan (TARP) – aka the bailout – morph into help for consumers.”

But despite the Treasury’s best efforts, Dhawan is cautious about future growth prospects beyond this recession.

“Growth will be subpar as the credit that greases the wheel of a modern economy will be in short supply for the near future. Will it ever climb back to old levels after 2010? I doubt it.”

Highlights from the Economic Forecasting Center's National Report:

Real GDP growth for 2008 will be 1.3%, decelerating sharply to a negative 1.3% in 2009. In 2010, real GDP will grow by a subpar 1.2%.
For 2008, consumption growth will average only 0.4%, decline by 1.1% in 2009, and then grow weakly by 1.0% in 2010.
The unemployment rate will rise sharply from its 5.7% average to 7.6% in 2009 and then rise further to 8.3% in 2010. During this recession the economy will lose a total of three million jobs.
Vehicle sales will drop from their 13.3 million pace in 2008 to only 11.2 million units in 2009. A modest recovery is expected in 2010 with projected sales of 13.5 million units.
After averaging $100 per barrel in 2008, oil prices will average only $54.2 per barrel in 2009 and then rise to $66.7 per barrel in 2010. For 2008, the inflation rate will average 4.2%, but is expected to moderate sharply to a 0.6% rate in 2009. In 2010, the inflation rate will be a somewhat higher 2.0%.

Georgia and Atlanta – Volatile Economic Climate Damages Georgia’s Job Growth

Georgia’s economic picture has gone from bad to worse as job losses mount, bankruptcy rates increase and home prices continue to depreciate. According to Dhawan, the prognosis for the coming year is just as bleak as weak corporate spending brings with it a flood of layoffs looming on the horizon before giving way to a tepid recovery in 2010.

In his Forecast of Georgia and Atlanta, also released today, Dhawan said that the intensity of the job losses over the last few months has been more severe than expected.

“Since our forecast in August, job growth has been substantially downgraded,” he said. “So far this year, we have lost almost 41,100 jobs and job losses are expected to continue at this heavy rate for the next quarter as we lose another 34,000 jobs. Thus, for the calendar year 2008, we will show a net loss of 75,100 jobs and another 72,000 jobs in 2009 making our total losses from the second quarter of 2008 to the end of 2009 170,000 jobs or 4.0% of the employment level.”
According to Dhawan, not even government jobs, which grew during the last recession and served as a cushion from the technology meltdown will help Georgia this time around as several government entities have announced layoff plans.

When will Georgia see better days?

"Given the expectations of a recession in the U.S. and increasing numbers of job losses and bankruptcy filings in Georgia, combined with the closing of GM and the merger of two of the state’s largest employers, Delta (with Northwest) and Wachovia (with Wells Fargo), we expect significant layoffs in the state,” he said. “As for recovery, we’ll have to wait until FY’11 when job growth finally turns positive though still far below its potential.”

Highlights from the Economic Forecasting Center’s Local Report:

For calendar year 2008, we anticipate 75,100 total job losses (25,800 premium jobs). In 2009, 48,500 job losses are expected in the first half of the year, followed by 23,600 job losses in the second half, making for 72,100 job losses (24,600 premium jobs losses). The recovery will be modest in 2010 when 27,800 jobs will be created (3,100 premium jobs).
Georgia’s unemployment rate will increase from its projected 6.0% rate in 2008 to 7.5% in 2009, and further to 8.0% in 2010. However, it will still be less than the national number.
Atlanta’s employment growth will remain negative for the remainder of 2008 for a total loss of 45,600 jobs (17,000 premium job losses). In calendar year 2009, we anticipate another 42,100 job losses (16,400 premium job losses). In 2010 recovery in the form of 17,200 jobs (1,900 premium jobs) is expected.
Atlanta’s total housing permits will plummet by in 2008 by 54.0% after a 34.6% decline in 2007. Permits will again decrease by 13.5% in 2009 before recovering mildly in 2010 (2.7% increase).

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