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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State Government Revenues Fall 16 Percent

/PRNewswire/ -- State governments took in nearly $1.7 trillion in total revenues in fiscal year 2008, a 15.8 percent decrease from 2007, according to new data on state government finances released by the U.S. Census Bureau. The largest share of those revenues came from taxes ($780.7 billion), which made up 46.5 percent. The decline was primarily because of a decrease in insurance trust revenue, which fell by $377.7 billion (72.7 percent).

Insurance trust systems are comprised of public employee retirement systems, the unemployment compensation system, state government workers' compensation programs and other state social insurance trusts.

Total state government expenditures increased 6.2 percent from fiscal year 2007,
totaling slightly more than $1.7 trillion in 2008. Education ($546.8 billion), public welfare
($412.1 billion) and highways ($107.2 billion) represented the top three outlays, accounting for nearly two-thirds of all state government total expenditures.

The findings come from the 2008 Annual Survey of State Government Finances, which includes data on revenues, expenditures, debt, and cash and security holdings for each state, as well as a national level summary. The major source of these finance statistics is the governments' own accounting systems, either directly from a government's own records or through intermediate reporting systems.

Eleven states spent more than 25 percent of total expenditures on public welfare, with Tennessee (32.8 percent), Maine (30.5 percent) and Rhode Island (29.8 percent) spending the highest percentage of their total expenditures.

Public welfare spending is used to support people based on need and includes such items as old-age assistance, temporary assistance for needy families, and commodities and services provided under welfare programs, including medical care or burial services.

Hawaii (11.5 percent), Alabama (10.1 percent) and South Carolina (9.9 percent) led in spending on public health and hospitals as a percentage of total expenditures.

In addition to state taxes, state lotteries were another way many state governments (including Washington, D.C.) raised revenue in 2008. Total state lottery ticket sales reached $77.3 billion in 2008, an increase of 1.8 percent from 2007. Lottery prize payouts represented $56.7 billion in expenditures, a 1.4 percent increase over the previous year. And lottery proceeds represented $18.2 billion in state government revenue, an increase of 2.9 percent. New York ($2.7 billion), Florida ($1.4 billion) and California ($1.2 billion) led the nation in lottery proceeds.

The data used in the tabulations came from state government records. As such, they are not subject to sampling error. Although quality assurance methods were applied to all phases of data collection and processing, the data are subject to nonsampling error, including errors of response and miscoding. For information, visit the Census Bureau's Web site at: http://www.census.gov/govs/www/index.html.

For information on Georgia expenditures, visit http://www.census.gov/govs/state/0811gast.html

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Second Economic Stimulus Package: Emory Economists Weigh In

The American economy may need a second stimulus package, but whatever decision is made about what form it takes had better be made quickly, says Emory global finance expert Jeffrey Rosensweig, director of the Global Perspectives Progam at Goizueta Business School.

Fed chairman Ben Bernanke "is doing all he can, but he's having to overcome the negative economic and financial market news reverberating and building in waves around the globe," says Rosensweig. Making matters worse, he says, are investors, "who are often whipped up by the media's love of 'gloom and doom,' and are self-inflicting even deeper wounds by their fear-induced selling. This panicked selling turns negative forecasts into self-fulfilling prophecies."

Rosensweig thinks that the actions being taken, and likely to be taken, will eventually stabilize the financial markets and thaw what were frozen credit markets. "An easing of the credit crunch is already showing up in analyses of various interest rates," he says. Rosensweig's guarded optimism stems from his belief that that Bernanke has shown his commitment "to do everything it takes to turn this thing around."

Rosensweig continues to assert that: "Fighting the financial crisis will take good coordination globally, and political cooperation both within and across nations is essential. But there is no time to dither."

A former student of Bernanke's at MIT, Rosensweig is associate professor of international business and finance and director of the Global Perspectives Program. A former senior international economist at the Federal Reserve Bank of Atlanta, Rosensweig specializes in global strategy, global economics and international finance.

Stimulus Calls for Government Investment Spending

Any new government stimulus package should be aimed at government investment spending, says Emory economist Hashem Dezhbakhsh. "Two ways to expand spending are through government purchases or through transfers to consumers," he says. But with retail spending already down, and many people worried about jobs, mortgages, debt and the future, consumers are unlikely to start spending more based on a one-time check from the government.

"I honestly think that if government wants to stimulate spending, it should look at the kind of things we did after World War II. Invest in roads, bridges and other infrastructure projects. When you do this kind of construction, it helps create jobs and demands for goods, services and materials that just doesn't happen otherwise."

Unrestrained Regulation Could Stall Economy

Economist Paul Rubin warns that whatever form a stimulus package takes, the federal government may be on track for over-regulating in the wake of recent failures in the economy. "The problem with government regulation is not that clever economists can't draft good regulations; the problem is that what usually gets adopted is more a matter of political expediency than what actually might work," he says.

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Medicaid Spending Projected to Rise Much Faster Than the Economy

Cumulative Spending on Medicaid Benefits Projected to Reach $4.9
Trillion Over 10 Years

Under current law, spending on Medicaid is expected to substantially
outpace the rate of growth in the U.S. economy over the next decade,
according to a new annual report released today by the Centers for
Medicare & Medicaid Services (CMS).

The report projects that Medicaid benefits spending will increase 7.3
percent from 2007 to 2008, reaching $339 billion and will grow at an
annual average rate of 7.9 percent over the next 10 years, reaching $674
billion by 2017. That compares to a projected rate of growth of 4.8
percent in the general economy.

HHS Secretary Mike Leavitt presented the report today at the fall
meeting of the National Association of State Budget Officers (NASBO).

"This report should serve as an urgent reminder that the current path of
Medicaid spending is unsustainable for both federal and state
governments. We must act quickly to keep state Medicaid programs
fiscally sound," Secretary Leavitt said. "If nothing is done to rein in
these costs, access to health care for the nation's most vulnerable
citizens could be threatened."

Although the CMS Office of the Actuary regularly produces 75-year
projections of Medicare expenditures for the annual report of the
Medicare Board of Trustees, the report released today is the first
annual fiscal report on Medicaid.

The Medicare Trustees Report provides detailed information on the past
and estimated future financial operations of the Hospital Insurance and
Supplementary Medical Insurance Trust Funds. This new annual report on
Medicaid contains analysis of past program trends and projections of
Medicaid expenditures and enrollment for the next 10 years only. Future
reports will expand on content to include longer-range projections and
more extensive analysis.

Medicaid is a federal/state partnership program that provides health
care to certain low-income people and is one of the largest payers for
health care in the United States. For both federal and state
governments, Medicaid is the largest source of general revenue spending
on health services. Notably, Medicaid is the largest source of general
revenue spending for health care for both the Federal government and the
states.

This growth rate compares to spending projections for Medicare of 7.4
percent per year through 2017. Medicaid benefits spending over the next
10 years is projected to be $4.9 trillion. These amounts are in
addition to that spent by federal and state governments on the State
Children's Health Insurance Program (SCHIP).


At this rate, Medicaid growth is projected to slightly exceed growth in
overall health care expenditures, which is projected by CMS actuaries
and economists to increase by 6.7 percent per year over the next 10
years, or over twice the rate of general inflation. Additionally,
Medicaid's share of the Gross Domestic Product (GDP) is projected to
reach about three percent in 2017. The combined share of GDP spending
for Medicare and Medicaid is projected to be 6.9 percent by 2017.

As a partnership program, both states and the federal government pay for
services to Medicaid beneficiaries. The federal government matches
state expenditures based on a formula that yields subsidies ranging from
50 percent to as high as 83 percent. The average federal medical
assistance percentage is 57 percent.

However, even with federal support, states report they are struggling to
meet their share of expanding Medicaid costs. State spending on
Medicaid has remained relatively stable as a share of states' budgets,
averaging about 20 percent from 1995-2007. However, some states such
as Maine are already spending as much as 31 percent of their budgets on
Medicaid, according to NASBO.

NASBO is projecting that state spending on Medicaid will increase by 4.4
percent from 2008 to 2009. NASBO says such an increase would be more
than four times the rate of growth in the average state general fund.

"High and increasing Medicaid spending clearly leaves states less able
to fund other state priorities," said Acting CMS Administrator Kerry
Weems. "This new financial report confirms that America's health care
system faces significant fiscal challenges.

"As a nation we must tackle the difficult job of bringing health care
costs under control and assuring that our health care dollars are buying
the highest quality, most efficient health care services."

Other findings from the report include:

* Average Medicaid enrollment is projected to increase 1.8 percent
to 50 million people in 2008.
* During the next 10 years, average enrollment is projected to
increase at an average annual rate of 1.2 percent and to reach 55.1
million by 2017.
* The estimated average cost of a person covered by Medicaid in
2007 is $6,120; however, per-enrollee spending for non-disabled children
($2,435) and adults ($3,586) was much lower than that for aged ($14,058)
and disabled beneficiaries ($14,858), reflecting the differing health
status of these groups.
* Medicaid represented 14.8 percent of all health care spending in
the United States in 2006.
* Medicaid is projected to grow as a share of the federal budget
from 7.0 percent in 2007 to 8.4 percent by 2013.

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