Subprime Debacle Results in Confidence Crisis; Creative Solutions Needed to Get the Economy Back on Track, Says Georgia State Forecaster
November 14, 2007 - (ATLANTA, GA) - The first phase of the summer's credit crisis is over. However, there is still an air of uncertainty in the economy as the nation tries to recover from the subprime debacle, concerns over increased oil prices and the Iranian situation, all which dominate headlines. But according to Dr. Rajeev Dhawan, director of the Economic Forecasting Center at the J. Mack Robinson College of Business, oil prices and Iran are not the problem; the key to a stronger economy will be the return of investor confidence in the credit market.
"The increase in oil prices is temporary. The chatter surrounding Iran is just talk. Our real problem is a confidence crisis. We are experiencing a type of market failure resulting from investors who have lost confidence in the ability of the rating agencies," said Dhawan in his latest Forecast of the Nation, released today.
In order for the economy to recover, investors need to be brought back into the fold. But Dhawan says as long as the subprime mortgages continue to default, the uncertainty will continue unless something else is done to restore the confidence.
"How much longer the defaults will continue is an unknown," he said. "What we need in the interim are creative solutions both by the Fed and the Treasury, such as accepting home mortgages as collateral and the proposed Superfund in order to contain the spillover of subprime defaults into the rest of the economy."
Additionally, Dhawan believes that the Fed will enact another rate cut in December to buy insurance against further negative spillover from the credit turmoil.
"While the consensus thinking is that the Fed is done with its rate cuts, my own read of the Fed's statement is that it has kept the door open for further action—or multiple actions. If the economic indicators begin to improve, then the cuts will stop in December," he said. "However, if the economy worsens, then the Fed will not hesitate to get back into the game."
Though the second phase of the credit crisis is a "moving target," Dhawan is optimistic that it will be brief and that the Fed's rate cuts will help pump liquidity into the credit market, which will help the economy see brighter days by mid-2008.
Highlights from the Economic Forecasting Center's national report:
- Overall, for 2007, real GDP growth will be 2.1%, but it will accelerate slightly to a 2.3% rate in 2008. In 2009, real GDP will grow by 2.5%.
- For 2007, consumption growth will be 2.9%. It will moderate sharply to 2.0% in 2008 and then grow by 2.7% in 2009.
- The core CPI inflation rate will ease from its 2.5% level in 2006 to 2.3% in 2007. In 2008, it will average 1.9% and will moderate to 1.7% in 2009.
- On an annual basis, the 10-year bond rate will average 4.7% in 2007, rise to 5.1% in 2008 and average 5.3% in 2009. Therefore, the 10-year rate is not expected to cross the 6.0% mark in the coming years.
Georgia and Atlanta—Corporate Woes and Credit Crunch Hold Back Georgia's Growth Potential
Like most states, Georgia has not been immune to the nation's credit crisis. Although the state's job growth rate has inched up over the last 6 months, Dhawan says that it's not enough to keep Georgia's economy from slowing down.
"Other than the retail sector, Georgia's job growth has actually been slowing and, most likely, we will not see any pick-up in growth until 2009," said Dhawan in his forecast for Georgia and Atlanta. "The exception has been in the hospitality, education and healthcare industries, which will keep expanding, but not enough to make up for the shortfall within the corporate sector and the ongoing slowdown in residential construction."
The biggest concern, according to Dhawan, is the mindset of the CEOs at Atlanta's large corporations, who are nervously watching the current housing market freefall and the ongoing credit squeeze.
"Their short-term solution is to scale down or hold back on expansion plans. If this wait-and-see attitude morphs into a longer holding strategy, then we are in for a nasty slowdown," he said.
On another front, unique to Georgia, is the concern over the current drought. So far, Dhawan says that while some farmers and marine-based businesses have felt the pinch, overall it has only caused minor inconveniences and has little impact on the overall economy. However, he warns that it could become a larger problem.
"If the drought worsens, then one of the biggest concerns from an economic standpoint would be the impact on the hotel industry. If drastic water restrictions were put into place, Atlanta would surely lose convention business, which is critical to the area's growth," said Dhawan.
Dhawan admits that all of the "ifs" could drastically impact Georgia's economy. However, while the forecast may not be all that sunny, Dhawan expects the area to weather the storm without too much pain.
Highlights from the Economic Forecasting Center's local report:
- Georgia's employment on a calendar-year basis will gain 77,000 jobs in 2007, 56,400 jobs in 2008 and 91,200 in 2009. On an annualized basis, Georgia's employment will increase by 1.7% in 2007, 1.3% in 2008 and 1.9% in 2009.
- Georgia's premium jobs ($45,000+), on a calendar-year basis, decreased by 500 jobs in 2006 but will increase by 8,200 in 2007. In 2008, Georgia will add 6,900 premium jobs and 19,700 in 2009.
- Employment in Atlanta on a calendar-year basis will increase by 54,300 jobs in 2007, 42,300 jobs in 2008 and 59,300 in 2009.
- Atlanta's total housing permits decreased by 5.2% in 2006. Permits will drop sharply by 28.5% in 2007, decrease again by 12.5% in 2008 and increase by 7.1% in 2009.
- All of Georgia's MSAs will add jobs in 2007 and 2008. The star metro areas will be Savannah, Hinesville, Warner Robins and Gainesville.
Mobile: 678-644-9032 Rajeev Dhawan
Economic Forecasting Center
Mobile: 404-867-2286
