(ATLANTA) - November 15, 2001 - The tragic events of September 11th followed by subsequent bio-terrorist threats have dealt the economy a recessionary punch. This blow weakened the last pillar of strength in the economy--consumer confidence--as a heightened degree of uncertainty has paralyzed both the consumption and investment decisions. At this point, the questions on everyone's mind are when will this downslide end, and how deep will this recession be? I expect the recession to last until the second quarter of 2002, followed by a quick and decisive recovery both in terms of job growth and income.
This conclusion is based upon making certain assumptions in the prevailing high degree of uncertainty faced by both businesses and policy makers. My feeling is that by early spring the war effort will reach its "equilibrium" stage without any further "major" terrorism incidents. Additionally, oil prices will stay on course without risk of any sharp spikes within the next six months. Despite these optimistic assumptions, consumer confidence will continue to plummet which will force this recession to be slightly deeper than the 1990-91 recession. The recovery will resemble a classic "V" shape versus the drawn out "U." This is illustrated in the forecast for real GDP growth when after dropping by 0.8 percent in 2002, it recovers sharply in 2003 to grow by 3.8 percent.
The Economic Forecasting Center forecasts the following:
- The FED has already cut the FFR by 450 basis points in the last 10 months. Expect the funds rate to be 1.25 percent by early spring as it tries to stem the economy's decline.
- The next three-quarters are going to be ones of negative real GDP growth. Real output will decline by 3.3 percent in the 4th quarter of 2001, followed by -3.1 percent growth in the first quarter, and -1.0 percent in the second quarter of 2002. The economy rebounds sharply in the last two quarters of 2002 with 4 percent plus growth rates.
- Moderate oil prices and soft labor markets resulted in a drop in inflation in the third quarter. This trend will continue as future layoffs are expected to push the unemployment rate to 6.4 percent in 2002 before decreasing to 5.6 percent in 2003. Inflation, after posting a 3 percent rate in 2001, will decrease to 2 percent in 2002 and then increase slightly to 2.5 percent in 2003.
Low mortgage rates have kept the housing sector strong, so far. With upcoming job losses and rising unemployment rates, expect the housing starts to drop sharply from their lofty levels of the 1.6 million range in the third quarter of this year to the 1.3 million range in early 2002. They will remain at this level until late 2002 when, following the recovery, they will cross into the 1.4 million-unit range.
Forecast for Georgia and Atlanta
Job losses coupled with the fear factor have lead consumers to a rational wait, watch and see decision. In turn, this is bad news for retailers, as wary shoppers will pull back from consumption this coming Christmas season.
As of September, Georgia's economy had already lost 52,000 jobs (based on numbers from May 2001 through September 2001 and seasonally adjusted by the Economic Forecasting Center). Slightly less than half of the job losses were in the Atlanta metro area which accounts for more than two thirds of Georgia's total economy. Thus, the Atlanta area was somewhat shielded from the downtown because of its diversified economy. Now, those very shields - service area jobs in tourism, transportation and hotels - are somewhat of a liability as the modern way of life is attacked. This implies that total job losses in this downturn will be approximately 125,000 for the state of Georgia and 80,000 in the metro Atlanta area, with an expected recovery to start in the summer of 2002. The unemployment rate, after averaging 4.2 percent in 2001, will rise sharply to 5.3 percent in 2002, before decreasing to 5 percent in 2003.
The other highlights of the forecast are as follows:
Service sector jobs, after growing by only 1.9 percent growth in 2001, will decrease by 2.3 percent in 2002, before recovering to a rate of 3.6 percent in 2003. Within the service category the biggest decline will be in business services, which actually contracts by 6.1 percent in 2001. This category again contracts by 9.0 percent in 2002. Within business services, the computer service category comes down from its super-charged pace of 11.2 percent in 2000 to Ð0.3 percent in 2001. This category returns to a normal growth pattern in 2003.
Construction sector employment will decline by 1.7percent in 2001. However, this industry will feel greater pain in 2002, contracting 5.4 percent before resuming a positive growth of 3.2 percent in 2003.
Slower income gains will also be reflected in tax receipts. After increasing by 6.5 percent in fiscal year 2001, tax collections are expected to decline by 3.9 percent in fiscal year 2002 and then increase approximately 2.8 percent in 2003, following the recovery.
Atlanta's unemployment rate is expected to increase to 3.7 percent this year, rise sharply to 4.7 percent in 2002 before falling back to 4.4 percent in 2003.
The number of housing permits after declining marginally this year to 53,855 will drop sharply by 17.2 percent to 44,583 in 2002 reflecting weakness in multi-family units. Housing permits will rebound mildly to 45,868 in 2003.
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