May 21, 2003 (ATLANTA) While deflation is a distinct possibility and more likely than a strong economic recovery, healthy levels of consumer spending, corporate balance sheets and a stable stock market combined with good old fashion luck will keep the nation from the dangers of deflation, according to the Forecast of the Nation (May 2003) released today by Dr. Rajeev Dhawan, director of the Economic Forecasting Center at the Robinson College of Business.

According to Dhawan, the decision by the Federal Open Market Committee (FOMC) to hold interest rates steady but issue a warning regarding the falling rate of inflation was a message to the bond market to keep long-term rates low. This will keep the "refinancing boom going a bit longer."

"This will keep the growth in consumer spending going which means that by late summer businesses will see increased sales figures and improved cash-flow margins," says Dhawan. "This signal of a sustained demand for products will translate into increased capital expenditures and hiring in late Fall, making strong GDP growth in 2004 a distinct reality."

However, Dhawan warns that this is where luck comes into play.

"The luck factor is clear, if SARS spreads and causes consumer confidence to plunge, than it will start a downward spiral, "says Dhawan. "On top of that, if Congress is imprudent on spending issues then the stage will be set for the bond market to panic which could raise long-term bond rates immediately, affecting mortgage rates and thus killing any new surge of home financed-fueled consumption. All this could set us up for not just delayed recovery but no recovery at all."

So how likely is this scenario?

"For consumers to independently spook themselves for no apparent economic reason is hard for me to imagine," explains Dhawan. "For the bond market to react badly to predicted deficits means that they are totally discounting any possibility of an up tick in the economy, which I also don't buy."

Based on this, Dhawan is confident that the country will dodge the deflation bullet.

Highlights from the Economic Forecasting Center's national report:

• Real GDP will increase by 1.8% in the third quarter followed by a respectable 2.9% in the fourth quarter of 2003 - Expect an acceleration of growth in the first half of 2004 when real GDP grows by 4.4% followed by 4% in the second quarter. For the year 2004, real GDP growth is 3.4%, almost double the growth of 1.9% in 2003. Growth moderates to 2.9% in 2005.
• Fixed investment grew by 4.4% in the fourth quarter of 2002 for the first time in two years due to a mild rebound in equipment and software. In the first quarter of 2003, investment growth was barely positive and the minor rebound in equipment and software vanished as they dropped 4.4%. The investment outlook remains bleak for the rest of the year as businesses wait for cash flow margins to recover. Look for investment to pick up speed in the fourth quarter when it grows by 11.6%.
• Given that the upcoming few quarters are of weak growth, the unemployment rate will rise to 6.2% and then start to decline in late 2003 with a final annual average of 6%. In 2004 it will moderate when recovery arrives and finish with an annual average of 5.6% it will fall a bit further to 5.5% in 2005.

Georgia and Atlanta Recovery - Redefining Normalcy - Tourism, transportation and telecom (the three T's) catapulted Georgia to new heights during the 1990s, but over recent years helped drive Georgia further into a recession. Going forward, moderation will drive recovery in these sectors and Georgia will have to adjust to the new reality of diminished growth rate capacity says Dhawan in his quarterly Forecast of Georgia and Atlanta (May 2003) also released today.

According to Dhawan, this means more moderate expectations of job additions, a reduced forecast for housing, existing home price appreciation, and hotel and office building construction.

"Even though Georgia will begin to add jobs by late winter, travel and tourism will lag and the airline industry will suffer the consequences. All of this will impact the metro area's recovery time-frame and its level of strength," warns Dhawan. "As Delta and the others get back on their feet in mid-2004, the Atlanta metro area will exhibit a slow and less intense recovery."

Highlights from the Economic Forecasting Center's local report:

• By the end of 2004, Georgia will be adding 6,000 - 7,000 jobs per month which is about 25% slower than the rate of growth in the 90s and 35% lower than the go-go growth of the late 90s. In 2003, Georgia grew at almost zero percent. In 2004, the state will grow by 1.4% and then by 2.2% in 2005. Atlanta shows a modest decline of 0.4% in 2003, followed by 1.5% growth in 2004 and a healthy 2.3% in 2005.
• Total housing permits in metro Atlanta dropped 13.8% in the first quarter of 2003. Going forward, total housing permits in 2003 will decline by 15.9%. The bulk of which are from multi-family permits, which will decline by 46.7%. Single family permits will fall by 6.3% but will turnaround and rise by 5.9% in 2004 and 3.4% in 2005. By then, total housing permits will make healthy gains of 5.1% and 4.8% in 2004 and 2005 respectively
• Atlanta's unemployment rate will rise from its 4.8% annual average rate in 2002 to 5% in 2003. It then drops to 4.7% in 2004, and then again to 4.4% in 2005.
• For the year 2003, service sector employment will increase 1.4%. As the recovery strengthens in mid-2004, it will recover at a 3.1% pace in 2004, followed by a 3.7% growth rate in 2005.