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February 19, 2003 (ATLANTA, GA) -- The intensity and duration of the pending conflict with Iraq will determine the extent of the downside of our economy and will dictate the strength of the subsequent recovery, according to the Forecast of the Nation (February 2003) released today by Dr. Rajeev Dhawan, director of the Economic Forecasting Center at the Robinson College of Business.
"Assuming a quick victory in Iraq and no long-term damage to the oil production facilities in the Middle East, the economy's growth engine should begin to roar early in the fourth quarter," says Dhawan.
"The rebound is slightly delayed because capital budgeting decisions are made far in advance of what shows up in the NIPA data as investment spending," continues Dhawan. "These decisions are primarily a function of cash flow and interest rate conditions."
According to the report, the current hike in oil prices will continue through the conflict and will take time to moderate, also causing the delayed rebound. However, as in previous recessions, the rise in oil prices will not lead to "cost-push inflation" and hence the Federal Reserve Bank will "hold pat."
"Inflation is currently at a benign 2% level which the Fed deems 'acceptable' and the economy is still below its potential. The last thing Greenspan will do is fight cost-push inflation with a rate hike," said Dhawan.
Highlights from the Economic Forecasting Center's national report:
- Real GDP will increase by 1.1% in the first quarter and only 1.3% in the second quarter of 2003 Ð as both private investment and consumption remains depressed due to war worries. Expect an acceleration of growth in the second half of 2003, especially in the fourth quarter, when real GDP grows by 4.5%. For the year 2004, real GDP growth is 3.6%, more than double the growth of 2003. Growth moderates to 3% in 2005.
- Fixed investment will fall 0.3% in the first quarter, grow slightly by 1.6% in the second quarter and increase at an anemic rate of 2.5% in the third quarter of 2003. Investment will pick up speed in the fourth quarter when it grows by 7.1%.
· Expect 2.8% and 2.4% increases in inflation in the first and second quarters of 2003. Inflation for the year 2003 will be 2.3%, stay at that level in 2004 but rise modestly to 2.7% in 2005.
- With the upcoming war and slowdown in the economy, unemployment will be in the 5.7% to 6.2% range. It starts to moderate in 2004 when recovery finally arrives. Expect the unemployment rate to rise slightly from its 5.9% annual average in 2002 to 6% in 2003. It will come down to a 5.7% average for 2004, and then to 5.5% in 2005.
State Tax Revenue and Company Cash Flow Dictate Georgia Rebound -
While the intensity and duration of the impending war will determine the extent of Georgia's economic woes, the strength of the recovery will depend on how quickly the state tax revenue and cash flow at companies recover once the war is over says Dhawan in his quarterly Forecast of Georgia and Atlanta (February 2003) also released today. While the nation will begin to see a recovery by early fourth quarter 2003, metro Atlanta's recovery will lag slightly with a recovery expected at the end of the fourth quarter.
"This lag is not too substantial but will be a new thing for this metro region which had recovered earlier than the U.S. in the previous downturn," says Dhawan. "However, once cash flow margins recover in early Fall, job growth will begin to take hold as CEO's gloomy moods will turn sunny and they will give the go ahead for hiring and expansion."
According to the report, metro Atlanta's "three pillars of regional growth in the 90's (tourism, transportation and telecom) are still troubled." Passenger traffic at major airlines is down 10% or more, convention business is slow, and telecom is burdened with the excesses of the last bubble.
Additionally, the loss of 141,000 jobs in Georgia (which a few years ago was the bastion of job growth) has resulted in a decrease in tax revenues by almost 7%. Sales tax revenue, which constitutes almost one-half of the total revenue, is down by 10%.
"The spending plans have not been revised downward so the shortfall will lead to cutbacks in government spending and hiring," warns Dhawan. "So get ready for some belt tightening by the state and local government."
Highlights from the Economic Forecasting Center's local report:
- Georgia will display a -0.1% growth in 2003, rise to 1.6% in 2004, and then to 2.1% in 2005, when calculated using annual averages. For calendar year 2003 (Jan. to Dec.), Georgia will gain approximately 22,000 jobs followed by 78,000 jobs in calendar year 2004. Atlanta will add 23,000 jobs in 2003 followed by 53,000 jobs in 2004.
- Total housing permits in metro Atlanta dropped sharply by 26.2% in the fourth quarter of 2001, 4.2% drop in the first quarter of 2002, and then again by 15.5% in the second quarter. Going forward, multi-family permits will decline by 32.1% in 2003 and will rise by 5.9% in 2004 and 6.1% in 2005.
- Atlanta's unemployment rate will rise from its 4.8% rate in 2002 to 5% in 2003. It then drops sharply to 4.4% in 2004, and then again to 4.2% in 2005.
- The service sector jobs posted a disappointing 1.4% loss in 2002 after benchmark revisions, but are expected to rebound in 2003 by 3% and continue the trend in 2004 and 2005 with 3.8% for each year.
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 |
