Georgia Economic Outlook 2011

December 15, 2010

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Who, What and Where - More than 800 Atlanta executives, government leaders and University of Georgia alumni are registered for the Georgia Economic Outlook luncheon in Atlanta. The Dec. 15th program at the Georgia World Congress Center is the 28th annual economic forecast luncheon hosted by UGA's Terry College of Business. Speakers include UGA Provost Jere Morehead, Standard & Poor's Chief Economist David A. Wyss and Terry College Dean Robert T. Sumichrast.

The Georgia and U.S. economic forecasts summarized here were prepared by the Terry College's Selig Center for Economic Growth.

The Georgia Forecast

At a glance - In the forecast prepared by UGA's Terry College of Business, Dean Robert Sumichrast warned employers and investors against an overabundance of caution. "People and businesses are exhibiting an unusual degree of risk avoidance for a recovery that is about one-and-a-half years old," he said. "This is the time to take on some calculated risk if you want to benefit fully from the economic recovery and the expansion that will follow."

The Selig Center forecast noted that signs of cautious behavior are evident in the number of major corporations sitting on large cash reserves, in the reluctance of small businesses to hire or otherwise bet on more growth, and in the fact that consumers are saving more and borrowing less. "If my forecast for sustained economic recovery is correct, then too many people are playing it way too safe," Sumichrast said. "Interest rates are at historical lows, and banks are beginning to lend again. The best loans are often made during economic recoveries. And if you are a business leader, then consider investing some of your cash to raise output."

By the numbers - Coming out of the recession, Georgia's economy recovered sluggishly, recording 1 percent growth in 2010. The Selig Center forecasts that Georgia's economy will sustain the recovery and expand by 2.3 percent in 2011, after adjusting for inflation. The rate of growth in Georgia's gross domestic product (GDP) will match the nation's growth rate, which will be the first time in seven years that the state has caught up with U.S. GDP growth. "As the lingering effects of recent restructuring and the real estate bubble fade, Georgia will begin to outperform the U.S. in 2012," Sumichrast said.

But where's the growth? The answer is that the forces driving economic growth are fundamentally shifting from public to private sector. "We're almost through with government stimulus and inventory building." Sumichrast said. "Going forward, GDP growth will be based primarily on consumer demand, both foreign and domestic. Now that the baton has been passed to the private sector, the economy is no longer on life support. The recovery has become self-sustaining. But due to weak job growth, it's almost certain to continue very slowly."

2011 ends three years of net job loss - The odds of finding a job will improve in 2011, though the state's jobless rate will remain stubbornly high. "Georgia's non-farm employment will rise by about 1 percent," Sumichrast said. "That will be the first annual gain the state has seen since 2007. Wages will rise by about 1.5 percent. The state's unemployment rate was 9.9 percent in October and will decline to about 9.5 percent at the end of 2011."

The state's fastest-growing industries in 2011 will be business services and the transportation and warehousing industry. And for the first time in many years, Georgia's manufacturing industries will be hiring. "Many of these new factory jobs will owe their existence to consumers' and businesses' pent-up demand for durable goods," Sumichrast said. "Manufacturers of nondurable goods also will be adding to their workforces, but at a slower rate."

Consumer spending and savings - Sumichrast said now is a good time to bet on consumers to spur on the recovery. Consumer spending will increase about 2 percent in 2011, which isn't great from a historical perspective but is an improvement on the percentage gain in 2010. "Consumers' tightfisted attitudes won't change quickly," he said. "Their restraint in spending reflects the broad-based deterioration of household finances. As households shifted priorities from spending to savings, the savings rate rose five-fold - from 1.2 percent in 2005 to 6.0 percent now. But savings are helping households pay off some of their excessive debt."

Homebuilding digs out of the ditch - Home sales will continue to rebound in 2011 and that should allow Georgia's home prices to stabilize. But the huge inventory of unsold homes will keep a lid on home-price appreciation. The number of new single-family housing permits issued in Georgia increased an estimated 14 percent in 2010. Next year, it's forecast to increase by almost 21 percent. But even those percentage increases pale in comparison to the plunge in activity that occurred since homebuilding peaked in 2005 (almost a 90 percent drop-off).

"I believe that Georgia's prolonged and severe housing bust has run its course," Sumichrast said. "Employment and personal income growth are expected in 2011. Those new jobs, bigger paychecks - along with stabilizing home values - will give more people the wherewithal and the confidence to buy homes. As a result, homebuilding will contribute to Georgia's economic growth in 2011."


The National Forecast

At a glance - The national economic recovery that began in the second half of 2009 will be sustained through 2011, but the rate of U.S. economic growth, measured as gross domestic product, will slip marginally - from 2.7 percent in 2010 to 2.2 percent in 2011. This slightly lower growth rate reflects the federal fiscal stimulus, which is dissipating and less spending by many state and local governments, but consumer demand will increasingly drive the forward momentum of the recovery in 2011.

"Many of the major imbalances that led to the Great Recession have been corrected," Sumichrast said. "Analysis by our Selig Center indicates that the housing market has fully corrected, non-residential real estate has largely corrected, and the trade deficit has partially corrected. In addition, household balance sheets have improved." Because these imbalances in the private sector have been eliminated or drastically reduced, the necessary conditions for a double-dip recession are unlikely.

Interest Rates - Another reason why Sumichrast called the current climate "a good time to take on some risk" is that the Federal Reserve will continue to support a monetary policy of near-zero percent short-term interest rates until early 2012, as long as the economy doesn't heat up ahead of the baseline forecast calling for lackluster growth.

"The Fed will accomplish that by keeping policy rates low," Sumichrast said, "and by continuing their second round of large-scale purchases of treasuries. The abundance of liquidity will keep rates low for a while, but I worry about two unintended consequences: significantly higher inflation and significantly higher interest rates in 2013."

Inflation - The Selig Center forecast projects consumer price inflation to increase by 2 percent in 2011, compared with 1.5 percent this year. Price inflation appears to have bottomed out in the first quarter of 2009 and is drifting higher. But there are no strong signals that inflationary pressures will be a problem next year. However, the outlook for inflation beyond 2012 is more ominous. According to the forecast, "The federal debt is skyrocketing in absolute terms and as a percentage of GDP. Despite the lack of a good substitute, the U.S. dollar could gradually lose some of its status as a reserve currency or safe haven. China and other countries with large foreign currency holdings may choose to gradually diversify their portfolios away from U.S. dollar assets."

Some threats persist - For the U.S. economy, the major remaining recessionary risks are that the financial crisis re-intensifies and job growth fizzles out. "Plus, despite ample liquidity, the banking system is still not completely fixed," Sumichrast said. "Banks are making some new loans, but bank lending is still contracting overall." And, in Europe, government deficits have grown in the wake of the recession and pose a significant risk to global financial markets. Similarly, the outsized budget deficit in the U.S. cannot be sustained for more than a few years without doing damage to economic growth or forcing interest rates higher to attract the needed capital.

A SNAPSHOT OF THE SELIG CENTER'S FORECAST FOR 11 INDUSTRY SECTORS
And how they'll perform in comparison to the other sectors of the economy in 2011:

Construction
• Direction: Large decrease
• Performance: Much worse than most

Manufacturing
• Direction: Large increase
• Performance: Much better than most

Transportation
• Direction: Moderate increase
• Performance: Better than most

Public Utilities
• Direction: Slight increase
• Performance: Average

Information
• Direction: Moderate increase
• Performance: Average

Financial Markets
• Direction: Moderate decrease
• Performance:Worse than most

Retail Trade
• Direction: Moderate increase
• Performance: Average

Services
• Direction: Large increase
• Performance: Much better than most

Hospitality
• Direction: Flat
• Performance: Below average

Life Sciences
• Direction: Large increase
• Performance: Much better than most

Government
• Direction: Slight decrease
• Performance: Worse than most

 

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