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May 19, 2004 (ATLANTA) Signs of inflation have fueled expectations that the Federal Reserve will raise interest rates in June. However, Dr. Rajeev Dhawan, director of the Economic Forecasting Center at the Robinson College of Business, says not to expect rate hikes until August and then only if the current rebound in job numbers continues. He also predicts a slow increase of 250 basis points spread out over the next 2 1-2 years.
In his Forecast of the Nation (May 2004) released today, Dhawan answers those who see inflation as a reason the Federal Reserve may raise rates earlier. "Yes, the rate of inflation has increased but it was just a year ago that we were worried about deflation. The recovery, especially job growth rebound is still in it infancy -- we've just barely succeeded in 'reflating' the economy."
According to Dhawan, while a pace of 236,000 monthly jobs is above the new norm of 150,000, the economy needs to create 330,000 jobs per month just to keep the unemployment rate from rising. "I expect Greenspan to use the next three months to look for additional momentum, prepare the market's expectations and then act in August."
There's another reason to hold off until August -- the June handoff in Iraq.
"Ironically, the deadline for the handoff coincides with the Federal Reserve meeting. I seriously doubt, given the news coming out of Iraq that Greenspan will gamble with a rate hike," says Dhawan. "Additionally, it is the last day of Greenspan's chairmanship of the Federal Open Market Committee (FOMC) and while his reappointment has been all but guaranteed by the president, it's still an issue that needs to play out."
Highlights from the Economic Forecasting Center's national report:
- Real GDP will grow by 4.6% this year. However, 2005 is not as strong at 3.4%; a similar growth rate of 3.5% is also seen again in 2006. The main factor in this moderation is that the FED will raise rates in late 2004 to prevent overheating.
- Expect inflation to be 2.4% in 2004, followed by a 2.2% rate in 2005, before dropping to 1.8% in 2006. Core inflation will inch up from its 1.5% level in 2003 to 1.8% in 2004. For the year 2005, core inflation is 2.3% and moderates a bit to 2.0% in 2006. On an annual basis, the prediction for the 10-year bond rate is to average 4.7% in 2004, rise to 5.4% in 2005, and be in the 5.6% range by 2006.
- The unemployment rate will drop slightly from its 6.0% annual average in 2003 to 5.6% in 2004, and stay there in 2005.It will then drop slightly to 5.5% in 2006.
- For the year 2004, consumption growth will be a strong 3.9%, a sharp rise from the 3.1% rate in 2003. By 2005, consumption growth is down to 2.9% and rises mildly to 3.2% in 2006.
Georgia and Atlanta - Job Quality Finally Coming Back As Area Economy Improves
While Georgia has only added 4,100 jobs over the last six months, it is the first time since the recession ended that the state has seen an increase in high paying jobs. According to Dhawan, this combined with an up tick in personal income growth is a clear sign that the area is headed in the right direction.
"This is the first time that job quality has shown any improvement in close to a year," says Dhawan in his quarterly Forecast of Georgia and Atlanta (May 2004) also released today. "Based on a calendar year (January to December), Georgia will add 12,000 high paying jobs, which is 23% of all jobs created in the year. This rate is much healthier than the loss of 38,000 high paying jobs in 2003."
According to the report, personal income growth in Georgia grew by 4.1% in 2003 versus 2.5% in 2002. Additionally, Dhawan expects income growth for 2004 to slightly surpass 2003.
However, while these gains are a positive sign that the local economy has gained its footing, Dhawan notes that it is a far cry from the seven to eight percent growth that was consistently recorded in the late 1990s.
"One of the factors affecting our recovery is the health of some of our major employers like Delta, Coke, BellSouth, and Georgia-Pacific," says Dhawan. "If you want to know where the main growth engine is you need to look at smaller firms especially those in the IT and security sector as well as public construction projects like Hartsfield's fifth runway and new international terminal."
However, according to Dhawan, reaping rewards from those projects and other road and highway improvements will not begin for another two to three years.
"The only guaranteed boost right now is from the G-8 Summit on Sea Island in June, which will help the Savannah metro area in particular."
Highlights from the Economic Forecasting Center's local report:
- The new benchmarked numbers showed that 2003 had a modest job loss of 0.2% on the heels of a 1.9% drop in employment in 2002. For 2004, things will get better with job growth at 1.2%, followed by a decent 2% growth in 2005 and a respectable 2.4% in 2006. Atlanta's growth rate is also in the same league, with growth in 2006 touching 2.8%.
- Georgia will gain 51,200 jobs in 2004 and Atlanta will end the year up by 41,900 jobs. Growth will be better in 2005, when 93,100 new jobs will be created in Georgia and 61,900 new jobs will be created in Atlanta. The good news is that by late 2004, the quality of the job growth begins to pick up.
- The current (March 2004) seasonally-adjusted unemployment rate is 3.6% in the state. This is almost a percentage point lower than the 4.9% rate seen in March 2003. The annual average will decrease slightly to 4.2% in 2004 and will stay at this level through 2005. In 2006, the unemployment rate will inch down again to 4.1%. For Atlanta, the unemployment rate which was 4.7% in 2003 will drop slightly to 4.1% for 2004 and 2005. It will then drop again to 4% in 2006.
- Total housing permits in 2004 will decline by 7.7%. Both single-family and multi-family will have a difficult time this year, with single-family permits declining by 5.6% and losses coming from multi-family permits at 17.4%. In 2005, total permits will decline again by 4.8% but will recover in 2006 to post a 2.2% growth rate.
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
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