U.S. Economy "Just Right;" Patient FED Helps Navigate Soft Landing in 2007 Says Georgia State University Forecaster
May 24, 2006 (Atlanta, GA) - Currently, the U.S. is enjoying a "Goldilocks economy," says Dr. Rajeev Dhawan, director of the Economic Forecasting Center at the J. Mack Robinson College of Business, despite high oil prices. However, in his latest Forecast of the Nation released today, Dhawan says that a moderating housing market and a new Federal Reserve Chairman will make for some uneasiness over the summer before the economy comes in for a soft landing by early 2007.
"So far the Fed has used rate hikes to keep core inflation in check. Unfortunately, the hikes have not tamed an overextended housing market which is helping keep oil prices up," says Dhawan. The big question, he says, and the concern on Wall Street, is will Bernanke become too aggressive with rate hikes if the housing market doesn't cool soon and core inflation ticks up due to high oil prices?
"Based on his remarks at his recent congressional testimony and the current data, I expect the hikes will end after June's meeting," says Dhawan. "While housing starts are still strong, they are on a downward trajectory. By the end of June, the vacation driving season will also be in full swing and any peak in gas prices will be history. Essentially, at this point, Bernanke will let past rate hikes run their course which will moderate the economy later this year."
The only real danger is if a surcharge from high oil prices gets passed on from businesses to consumers, eventually affecting core inflation. However, Dhawan says this is "unlikely as a moderating housing market will cool the economy's excess demand for oil and eliminate this issue by late fall."
Highlights from the Economic Forecasting Center's national report:
- Overall, for 2006, real GDP growth will be 3.2% and will moderate to 2.5% in 2007 as consumption moderates mildly but residential investment cools significantly. However, investment growth will remain strong. For 2008, real GDP growth will be 3.1%.
- On an annual basis, housing starts will average 1.805 million units in 2006 and will drop to the 1.612 million unit level in 2007 as effective mortgage rates edge closer to 7.0%. Housing starts will moderate further to 1.598 million units in 2008.
- In the 2nd quarter of 2006, expect the price of oil to average more than $70.0 per barrel and to moderate only to $66.0 per barrel by year end. Thus, for 2006, oil prices will average $68.2, decrease slightly to $63.7 in 2007 and edge down to $59.8 by 2008.
- The core CPI inflation rate will inch up slightly from its 2.2% level in 2005 to 2.3% in 2006 and 2007. In 2008, the core CPI will average 2.2%.
- For 2006, the 10-year bond rate will average 5.1% and rise to 5.5% in 2007. In 2008, it will average 5.6%, a rise from the preceding year. In this entire forecast period, the 10-year bond rate is not expected to cross the 6.0% mark.
Georgia and Atlanta - Georgia's Ebullient Economy Calls for a Future Dose of Caution
Despite anticipated setbacks from earlier corporate restructuring announcements, 2006 will be a fairly strong year for job growth in Georgia, says Dhawan in his Forecast of Georgia and Atlanta also released today. However, caution is still the "watch word" as high oil prices could affect a Delta recovery and rising interest rates will dampen the housing boom.
"Georgia has quite a few sectors chugging along," says Dhawan. "The tourism sector created over 35,000 jobs in the last three years and is on track to add the same number over the next three years." In addition, healthcare added nearly 7,000 jobs last year and will "pick up steam" in 2006. He also points to the March 2006 Household employment survey which reported an increase of 149,000 over the last year. "This is a reliable indicator for the creation of self-employed and small business jobs."
Dhawan assigns an "A-"to Georgia's current economy, but says the state's outlook is still under watch.
According to his report, the 10-year bond rate will increase from its 4.5% level to 5.1% in 2006 and 5.5% in 2007. "This rise is mild but enough to take the froth out of the housing market." In addition, while oil prices may not significantly impact consumer spending, it still may prove detrimental for Delta. "Delta narrowly avoided a major disaster when it came to a tentative agreement with its pilots. However, high oil prices are still the wild card that could wreck the best laid plan for the company's recovery. Expect Delta to announce further cutbacks as the year progresses."
Overall, Dhawan says that despite the potential setbacks, he expects Georgia to wade through the obstacles without much loss to its current momentum.
Highlights from the Economic Forecasting Center's local report:
- Georgia employment's level was revised significantly after this year's benchmarking. Employment increased by 92,233 for the 2005 calendar year. For 2006, Georgia employment will grow by 90,878 jobs and by 71,689 jobs in 2007. In 2008, Georgia employment will increase by 84,334 jobs.
- Georgia's premium jobs ($45,000 +), on a calendar year basis, increased by 10,348 in 2005 and will increase by 16,893 in 2006. In 2007, Georgia will see 12,651 premium-paying jobs and 14,576 in 2008.
- Employment in Atlanta, on a calendar year basis is expected to gain 62,997 jobs in 2006, create 48,494 additional jobs in 2007 and 60,586 jobs in 2008.
- The number of Atlanta's total housing permits decreased by 3.1% in 2005. Permits will decrease by 10.2% in 2006 and by 6.6% in 2007. In 2008, permits will remain at the same level.
Mobile: 678-644-9032 Rajeev Dhawan
Economic Forecasting Center
Mobile: 404-867-2286
