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With Credit Crunch Somewhat Abated, High Oil Prices Now Stand in the Way of Economic Recovery, Says Georgia State Forecaster
May 21, 2008 - (Atlanta) - Although the economy is in a recessionary zone, the ongoing credit crisis has somewhat stabilized as a result of the Federal Reserve's actions since the bailout of Bear Stearns in mid-March. But according to Dr. Rajeev Dhawan, director of the Economic Forecasting Center at the Robinson College of Business, the continued rise in oil prices not only will nullify any effects of the stimulus package but also will deepen the recessionary effects of the ongoing credit crunch. Although oil prices will moderate below $100 per barrel by early next year, substantial economic recovery will not happen until late 2009. Furthermore, healthier growth in employment is not expected until mid-2010.
"In mid-March when Bear Stearns was imploding, my pessimism reached its highest level since the credit crunch started last August. But the Fed's bailout and subsequent moves injected liquidity and reduced the financial system's flight to safety as displayed in the recent rise in the 2- and 10-year bond yields," said Dhawan in his Forecast of the Nation, released today. "Still, the commercial banks are unwilling to loan funds to each other for a longer duration and they're keeping a tight reign on consumer lending, especially in the hard-hit mortgage market, which has put a damper on the consumers' desire to spend."
Going forward, however, the big issue for the economy is the high price of oil. According to Dhawan, the cause of the increase is a simple case of demand outpacing supply, which remains tight.
"Net-net, the high price of oil is a permanent feature of this decade and consumers should be prepared to pay more than $100 per barrel until late fall when the global slowdown finally begins to make a dent in demand and subsequently in the price," said Dhawan.
Meanwhile, any further relief from the Fed in the form of rate cuts can be dismissed, since after its last cut in April, the Fed clearly signaled it was done for the time being.
"Now the issue is, when will the Fed start raising rates? The situation is complicated because it not only depends on when the economy recovers but also on how the high oil and food grain prices will behave in the coming months. My predication is that we will start to see rate increases in mid-2009," he added.
Highlights from the Economic Forecasting Center's national report:
- Overall, real GDP growth for 2008 will be 0.9%, rising slightly to a 1.0% rate in 2009. In 2010, real GDP will grow by 2.5%, still below the trend rate of 3.0%.
- Consumption growth is expected to be negative in the next two quarters before it improves to a barely positive 0.2% growth rate in the last quarter. For 2008, consumption growth will be 0.9%, before moderating to 0.8% in 2009. It will rise by 2.1% in 2010.
- Oil prices will average $94.3 per barrel in 2008, before moderating to approximately the $82.0 per-barrel mark in 2009 and 2010.
- Housing starts, which have experienced a downward trajectory for almost 3 years, will finally bottom out by late 2008. Starts will average 0.930 million units in 2008 and will rise mildly to 1.182 million units in 2009. Housing starts will rise again to 1.444 million in 2010.
- For 2008, the inflation rate will average 3.7% and will moderate to a 1.7% rate in 2009. In 2010, the inflation rate will average 1.9%. Meanwhile, the core CPI inflation rate will average 2.4% in 2008, followed by 2.1% in both 2009 and in 2010.
- The unemployment rate will rise from 4.6% in 2007 to 5.3% in 2008. It will rise again to 6.0% in 2009 and then drop to 5.5% in 2010.
Georgia and Atlanta—Current Economic Data Plays Tricks with Local Economic Picture
The proposed deal between Delta and Northwest keeps the headquarters in Atlanta which is good news for the local economy. However, with increased oil prices and the recession's impact on business and leisure travel, growth prospects at the area's largest corporate employer is not good, says Dhawan in his Forecast for Georgia and Atlanta.
"Planes don't fly on synergies from mergers, cost savings or on expanded networks. Planes require fuel, and with oil expected to remain above $100 per barrel in the next 6 months, the only way to shrink the fuel bill is to cut back on routes or capacity, which impacts the area's job growth prospects," said Dhawan. "Already, Delta has talked about cutting nine to 11% of its capacity by the second half of 2008. These cuts may get deeper if fuel prices remain high. Add in the ongoing credit crunch, housing woes, lackluster stock market and corporate desire to expand, and it all means that future income generation will suffer making for decreased consumer spending."
Despite the national doom and gloom, Georgia appears to have added jobs in the first quarter of 2008 while the national economy has lost jobs. But Dhawan warns that things may not be what they appear. "I would caution against the rosy picture being painted by the non-farm employment data because other economic indicators point to a different reality. Tax revenue collection growth is in the negative territory, unemployment insurance claims are growing sharply and housing starts are down substantially, all of which only happens in a recessionary environment," said Dhawan. "In addition, the 2008 benchmark revisions for the area revealed a sharp downgrade in calendar-year additions, and premium jobs showed a loss of 3,800 jobs instead of the positive gain reported. These are not signs of job growth."
Dhawan says any positive future job growth for Georgia is tempered when you take into consideration the few positives, such as healthcare jobs, and combine that with the negatives, such as increased oil prices.
"For the 2008 calendar year, Georgia will lose 7,000 jobs overall and 8,600 premium jobs. But Georgia will bounce back a little sooner than the rest of the nation, and I expect to see job recovery in early 2009," he said. "Then things will pick up steam in late 2009, and by 2010, job creation will be a strong 5.4%."
Highlights from the Economic Forecasting Center's Local Report:
- Georgia's employment on a calendar-year basis will lose 7,000 jobs in 2008. Job growth is expected to return in early 2009. Therefore, in 2009 we will add 44,000 jobs (calendar year), and the job creation pace will increase to 87,000 job additions in 2010.
- Georgia's premium jobs ($45,000+), on a calendar-year basis, decreased by 3,800 jobs in 2007 and again by 8,600 in 2008. In 2009, Georgia will add 8,000 premium jobs and 20,300 in 2010.
- Employment in Atlanta on a calendar-year basis will decrease by 3,700 jobs in 2008, increase by 34,100 jobs in 2009 and increase again by 65,200 jobs in 2010.
- Atlanta's total housing permits will drop by 39.1% in 2008 after a 34.7% decline in 2007. Permit activity will then increase by 6.5% in 2009 and 20.0% in 2010.
- Most of Georgia's MSAs will exhibit slower employment growth in 2008, with Albany, Columbus, Dalton and Macon observing job losses. In 2009, all MSAs will experience recovery.
| Contact: |
Gary McKillips
External Affairs/Robinson College of Business
(404) 413-7077 – voice
(678) 644-9032 – cell |
Dr. Rajeev Dhawan, director
Economic Forecasting Center
(404) 413-7261 – voice
(404) 867-2286 – cell |
The largest business school in the South and part of a major research institution, the J. Mack Robinson College of Business at Georgia State University is located in Atlanta, an epicenter of business and a gateway to the world. With programs on four continents and students from 150 countries, the College is both worldwide and world class. Its part-time MBA program is ranked number five in the nation and has been in the top 10 for 13 consecutive years. The College has 200 faculty, 7,400 students and 65,000 alumni. Noted for an emphasis on educating leaders, the Robinson College and Georgia State have produced more of Georgia's top executives with graduate degrees than any other school in the nation.
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