Hurricane's Negative Effects Give Way to "Almost Perfect Economy"
Says Georgia State Universitys Robinson College Forecaster
November 16, 2005 (Atlanta) - Elevated natural gas prices, rising heating costs and cuts in discretionary spending by consumers will continue to plague the nation's economy through mid-2006 says Dr. Rajeev Dhawan, director of the Economic Forecasting Center at the J. Mack Robinson College of Business.
"I expect the one-two punch from Katrina and Rita to impact GDP growth negatively by only 0.2% over the next four quarters," says Dhawan in his Forecast of the Nation (November 2005) released today. "The biggest impact from the storms is taking place now, in the fourth quarter of 2005, when consumption is expected to moderate sharply from its 3.9% pace in the third quarter to only a 1.5% growth rate." This moderation is the result of a drop in consumer confidence which, in part, stems from the impending rise in household heating cost. But according to Dhawan this will only affect consumption in the short-run and will not prove to have any long-term effects.
Dhawan's optimism stems from the fact that conservation has been the catalyst for the sharp decreases in oil and gasoline prices over the past few weeks. "While the average household can expect to pay $500 more this winter, I believe that the conservation effort will continue and help keep oil below the $60 mark in 2006, barring any more disruptions."
In addition, the reconstruction efforts will add to the growth rate in the second half of the year making for an "almost perfect economy."
What can dampen this optimistic forecast? According to Dhawan, "If core inflation gets to 3% it would signal to the Federal Reserve that inflation is getting out of control and the FED will not stop at the forecasted neutral rate of 4.5%."
Highlights from the Economic Forecasting Center's national report:
- Real GDP will grow by 2.6% in the fourth quarter of 2005 making for a yearly growth rate of 3.5%. This will slow to a 3.0% rate in 2006 as consumption moderates. In 2007, real GDP will post a 2.7% growth rate as business fixed investment also grows moderately.
- The CPI inflation rate drops from its current 5.1% to 3.5% in the next six months as oil prices moderate to below $60 a barrel. For the year 2005, the inflation rate will average 3.4% and will moderate a bit to 3.3% in 2006. The real drop comes in 2007 when inflation is only 1.8%. The core inflation rate will be in the 2.0% range for the next two years.
- After adding jobs at a strong rate of 175,000 per month in 2005, the job creation rate falls to 140,000 in early 2006. It falls further to the 130,000 range in late 2006 and early 2007. The unemployment rate inches up from its 5.1% in 2006 to 5.2% in 2007.
- The 10-year bond rate averaged 4.2% in the third quarter of 2005 and is not expected to cross the 5.0% mark before mid-2006. After averaging 4.3% in 2005, it will average 5.2% in 2006 and rise further to 5.5% in 2007.
Georgia and Atlanta - Hurricane Delta Will Make for Paranormal Growth
While the fallout from Delta will negatively impact Georgia's economy, Dhawan says that other positive factors will help to create paranormal growth in the state. According to his Forecast of Georgia and Atlanta (November 2005), increased tourism, small business growth, an up-tick in healthcare jobs, and strong growth in exports will save Georgia from "the mini disaster" Delta is going to cause.
"Delta plans to shave $3 billion by cutting up to 9,000 jobs and reducing salaries. Given that nearly 20,000 Delta employees live in the Atlanta area, these layoffs and salary cuts will make a significant impact to Atlanta's economy, particularly the south side where a majority of the employees live," said Dhawan. "In calculating the economic impact, we came to the conclusion that Delta's savings plan is equivalent to the Atlanta economy losing roughly 15,000 jobs."
Fortunately, other sectors are picking up Delta's slack. Tourism and exports, which were already showing strong signs, will benefit from the catastrophic events in New Orleans. "Conventions at the Georgia World Congress Center were expected to top 3,000 but the relocation of events from New Orleans to Atlanta will bring an extra 117,000 people here. With the aquarium opening shortly, these extra visitors will add more oomph to tourism's already rosy future," said Dhawan. "Additionally, the healthcare sector added 3,400 jobs in the third quarter and has created 8,500 jobs in the last year. Look for an increase of 10,000 jobs in calendar year 2005 and 18,000 in calendar year 2006."
Despite these positive signs, Dhawan cautions that Georgia is not out of the woods yet. "Liquidation is a very real and fearsome possibility if the bankruptcy courts are unable to solve Delta's financial issues. Additionally, the potential for the price of oil to skyrocket past September levels is another factor that could have devastating effects. Until then, my forecast shows job growth and a balanced economy...for now."
Highlights from the Economic Forecasting Center's local report:
- After the March 2005 benchmarking, Georgia employment increased by 1.3%, or 50,630 for the 2004 calendar year. For calendar year 2005, it will grow by 1.3%, a gain of 49,302 jobs. In calendar year 2006, Georgia will gain jobs at a 1.7% rate or 65,389 jobs and in 2007 it will increase 1.7% or 69,476 jobs.
- Georgia's high-paying jobs ($50,000 +), on a calendar year basis, will increase by 4,312 in 2005. In 2006, Georgia will see 3,830 high-paying jobs and 10,031 in 2007.
- Georgia's unemployment rate declined to 4.6% in 2004 from 4.7% in 2003. In 2005 it will rise slightly to 5.0%, but drop to 4.9% for both 2006 and 2007.
- The number of Atlanta's total housing permits increased by 0.7% in the first nine months of 2005. Permits will decrease by 2.0% in 2005 and by 9.8% in 2006. In 2007, permits will again decline at a rate of 3.3%.
Mobile: 678-644-9032 Rajeev Dhawan
Economic Forecasting Center
Mobile: 404-867-2286
