February 22, 2006 (Atlanta, GA) - The year has started off on the right foot and the nation's economy will maintain healthy levels for 2006. However, the last fourteen rate hikes by the Federal Reserve and the two additional hikes projected by early summer will make the U.S. economy feel the pinch as we approach 2007 says Dr. Rajeev Dhawan, director of the Economic Forecasting Center at the J. Mack Robinson College of Business.
While some experts are worried about a recession in 2007, Dhawan sees a moderation which he says is dependent on a slowdown in housing starts. According to Dhawan the "super-charged pace" of housing starts over the past two years has put pressure on economic resources.
"Net-net, if the housing sector doesn't slow down soon and release needed resources for the ongoing rebuilding in the Gulf and for the manufacturing sector's needs, price pressures will be felt in core CPI too," says Dhawan. "My forecast is that of an orderly moderation from the 2.035 million mark in the fourth quarter of 2005 to 1.644 million units by the end of 2006. This appears to be a drastic slowdown of 20%, but if it doesn't occur then the FED will be forced to raise rates above the current projected level of 5% and that's when all sorts of nasty things that can happen."
While he admits that the risks for a recession are there especially if the FED feels the need to "err on the side of caution" to fight inflation, Dhawan expects Ben Bernanke to follow in the footsteps of Alan Greenspan and bring the economy in for a "soft landing."
Highlights from the Economic Forecasting Center's national report:
- Real GDP growth will be a solid 4.5% in the first quarter of 2006. In the second quarter, growth slows sharply to 2.7% making for a first half growth rate of 3.6%. In the second half, the growth rate will moderate to 2.6%. For 2007, real GDP growth will be 2.6% and will increase mildly to 2.7% in 2008.
- On an annual basis, housing starts will average 1.749 million units in 2006 and will drop to the 1.630 million unit level in 2007 as mortgage rates edge closer to 7%. Housing starts will moderate further to 1.606 million units in 2008.
- On an annual basis, investment is expected to moderate a bit to 7.2% growth rate in 2006, following an 8.5% rate in 2005. Investment will again show a decent growth rate of 6.0% in 2007 but will eventually moderate a bit to 4.9% in 2008.
- The core CPI inflation rate will inch up slightly from its 2.2% level in 2005 to 2.3% in 2006. In 2007 and 2008, it will remain steady at 2.2%
- The 10-year bond rate averaged 4.5% in the fourth quarter of 2005 and is not expected to cross the 5.0% mark before mid-2006. For 2006, the 10-year bond rate will average 5.2% and will rise to 5.4% in 2007. In 2008, it will average 5.6%, a modest rise from the preceding year.
Georgia and Atlanta – Corporate Restructuring Strains Georgia's Job Growth – The relentless stream of corporate restructuring announcements by General Motors, Ford, BellSouth, and Hewlett-Packard will impact Georgia's current economic momentum somewhat, but according to Dhawan's Forecast of Georgia and Atlanta (February 2006), Delta's woes will continue to cause the most long-term harm to the job potential for the area.
"The momentum that came in the last six months of 2005 from a job growth surge in hospitality, healthcare and business services is impressive but will falter in the second of half of 2006 as Delta's layoffs, other corporate restructuring and an orderly moderation in housing permits put a dent in growth," says Dhawan.
In addition, economic forces affecting the U.S. and global economy will place a strain on Georgia, according to Dhawan. "High oil prices and a FED that under the new stewardship of Ben Bernanke will feel compelled to redemonstrate its inflation fighting-colors, combined with our own internal corporate restructuring issues will create headwinds that cannot be ignored," he said. "And this time we don't have the tech boom or the transportation surge of the '90s to counteract it."
However, Dhawan points to some encouraging news including the creation of more than 70,000 jobs in the 2006 calendar year of which 23% will be "premium wage jobs" that pay more than $45,000. In addition, between an additional 10 conventions, the Sugar Bowl and the new aquarium, the tourism sector is in "rock n' roll mode."
"Overall, the bad corporate news will serve to slow job creation but not reverse it. Therefore, our forecast is not as high as it would have been but considering the barrage of recent depressing corporate news, job growth in Georgia will stay reasonably healthy."
Highlights from the Economic Forecasting Center's local report:
- Georgia employment increased 57,676 for the 2005 calendar year. For calendar year 2006, Georgia employment will grow by 70,319 jobs. In calendar year 2007, Georgia will add 59,828 jobs. In calendar year 2008, Georgia employment will increase 66,284 jobs.
- Georgia's premium jobs ($45,000 +), on a calendar year basis, increased by 11,575 in 2005 and will increase by 16,172 in 2006. In 2007, Georgia will see 14,227 new premium jobs and 14,962 in 2008.
- Employment in Atlanta, on a calendar year basis is expected to gain 41,091 jobs in 2006, create 35,786 additional jobs in 2007 and 40,025 jobs in 2008.
- The number of Atlanta's total housing permits decreased by 3.1% in 2005. Permits will decrease by 9.9% in 2006 and by 6.1% in 2007. In 2008, permits will again decline at a rate of 0.9%.
The J. Mack Robinson College of Business is one of the top-ranked business schools. The College's Flex (part-time) MBA program has been listed in the top ten by U.S. News for the past nine years and its undergraduate business program is ranked among the top 50 in the nation. Robinson's Executive MBA program is listed among the world's bet by The Financial Times and BusinessWeek magazine.
For more information, contact:
Tammy Demel
Office of External Affairs
Robinson College of Business
404/413-7078
404/702-9743 (cell)
