Housing Slowdown and Decreased Consumer Spending Key to Keeping Inflation at Bay Says Georgia State University Forecaster
August 23, 2006 (Atlanta, GA) – The orderly moderation of the housing market combined with less consumer spending has already begun to produce a mild slowdown in the nation's economy, says Dr. Rajeev Dhawan, director of the Economic Forecasting Center. According to his latest Forecast of the Nation, released today, Dhawan says this slowdown will further deepen as housing starts continue to moderate and consumer discretionary spending takes a hit from elevated oil prices, thus keeping inflationary pressures in check.
"Economic indicators in the last few months are clearly signaling a slowdown in the home-building sector. This is precisely what the Bernanke-led Fed has been aiming for while undertaking 17 consecutive rate hikes before finally pausing at 5.25%," says Dhawan. "This pause should become permanent as the economy begins to moderate to a subpar growth rate of 2.0% in the second half of this year and a weak 1.9% in the first quarter of 2007. At that point, the Fed will do a rate cut to squelch the slowdown from spiraling further into a stall."
Meanwhile, concern over rising labor costs have made many wonder if we will see a wage-price inflation spiral similar to what happened in the 1970s.
"The three things needed for a spiral to occur, worker bargaining power, firm pricing power and an accommodating Fed are no longer factors today," says Dhawan. "Even if labor costs were to increase, firms have less pricing power today due to global competition. Fortunately, profit margins are high so firms are better able to absorb any increase in labor costs rather than pass them along to consumers."
However, should the Fed begin to see signs of an increase in inflation expectations, Dhawan says the Fed will "jump back in with rate hikes."
"That will only happen if the continuing moderation in housing stops or oil prices crash like they did in 1986, making for boom-like conditions that will stoke the inflationary fire," warns Dhawan.
Fortunately, he says that is a "very low probability scenario." Despite the economy's subpar growth, this time around, the Fed will take non-aggressive steps, avoiding a recession.
Highlights from the Economic Forecasting Center's national report:
- Overall, for 2006, real GDP growth will be 3.3% and will slow to a below trend 2.4% in 2007. In 2008, real GDP will post a 3.0% growth rate.
- On an annual basis, housing starts will average 1.814 million units in 2006 and will drop to the 1.610 million unit level in 2007 as mortgage rates edge closer to 7.0%. Overall, the cooling in the housing market is expected to be an orderly one.
- For 2006, oil prices will average $69.30, decrease slightly to $64.50 in 2007 and edge down to $60.70 by 2008. Hence, oil prices will remain above the $60 per barrel mark for the foreseeable future.
- The core CPI inflation rate will inch up from its 2.2% level in 2005 to 2.5% in 2006. In 2007, it will drop to 2.2% and will moderate further to 1.9% in 2008.
- The 10-year bond rate will average 5.1% in 2006 and rise to 5.4% in 2007. In 2008, it will average 5.5%, a modest rise from the preceding year.
Georgia and Atlanta – Georgia's Economy Weathers External Headwinds with Resilience
While nationally the economy has been plagued with an increase in short term interest rates, oil prices topping $70 per barrel, and the highest inflation in four years, Georgia has held its own, according to Dhawan in his Forecast of Georgia and Atlanta also released today.
"For the first six months of this year, Georgia created over 50,000 jobs and for the 12-month period ending in June 2006, the state added a total of 80,000 jobs," said Dhawan. "In addition, Georgia ended its fiscal year up by 9.3% in tax collections and the state's nominal personal income increased by 5.5% in the first quarter of 2006 compared to a year ago. This is above the 5.1% personal income average for the nation." Therefore, he gives the state an overall grade of A- which he says is not bad considering that just a year and a half ago, it was barely a B.
However, there are still some areas of concern including exports, manufacturing, construction and management jobs.
"Georgia exports only increased 4.8% in 2005 after an extremely strong 20.6% showing in 2004. Construction will add jobs at a much slower pace than in recent years while manufacturing will actually lose more the 12,000 jobs with the closing of the Ford and GM plants," says Dhawan. "As for the corporate sector, the BellSouth merger with AT&T, Koch's acquisition of Georgia-Pacific and Delta's continued trouble do not bode well for a large number of managerial jobs coming on line for any of these major employers."
Yet, Dhawan still sees a resilient Georgia with an increase in premium jobs (over $45,000) and strong growth in cities like Savannah and Brunswick. Other bright spots for Georgia include strong tourism, healthcare and small business sectors. "We're even getting reports that recruiters in the technology sector are busier than ever," says Dhawan. "Technology has already added 250 jobs in the last six months and I expect to see good job growth there for the next several years with 900 jobs in 2006, 2,200 jobs in 2007 and 3,500 jobs in 2008. Not bad for an industry that has lost a total of 30,000 jobs since 2001."
Highlights from the Economic Forecasting Center's local report:
- Georgia employment's level increased by 2.5%, or 92,200 for the 2005 calendar year. For 2006, Georgia employment will grow by 2.2%, a gain of 91,100 jobs. In 2007, Georgia will gain jobs at a 1.8% rate or 69,400 jobs. In 2008, Georgia employment will increase by 2.0% or 87,000 jobs.
- Georgia's premium jobs ($45,000 +), on a calendar year basis, increased by 10,300 in 2005 and will increase by 15,500 in 2006. In 2007, Georgia will see 12,600 high-paying jobs and 14,700 in 2008.
- Employment in Atlanta on a calendar year basis is expected to gain 64,000 jobs in 2006, create 47,600 additional jobs in 2007 and 62,300 jobs in 2008.
- The number of Atlanta's total housing permits decreased by 3.1% in 2005. Permits will decrease by 6.4% in 2006 and by 12.6% in 2007. In 2008, permits will again decrease by 2.1%.
Mobile: 678-644-9032 Rajeev Dhawan
Economic Forecasting Center
Mobile: 404-867-2286
