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Who, What and Where – About 1,250 Atlanta executives, government leaders and University of Georgia alumni are registered for the Georgia Economic Outlook luncheon in Atlanta. This year’s program at the Georgia World Congress Center is the 23rd annual economic forecast luncheon hosted by UGA’s Terry College of Business. Speakers included University of Georgia President Michael Adams, Gov. Sonny Perdue, Global Insight economist Sara Johnson and Terry College Dean George Benson.
The Georgia Forecast
At a Glance – “Georgia’s economy will grow a little faster in 2006 than it did in 2005,” according to Dean P. George Benson of UGA’s Terry College of Business. Gross state product will increase by 3.2 percent, improving upon the 3.0 percent increase expected for 2005. The better news, Benson said, is that the pace of Georgia’s job growth will nearly double, from 0.7 percent in 2005 to 1.3 percent in 2006. That’s in sharp contrast to the slightly slower employment growth forecast for the U.S. economy in 2006. “But even with this expected slowdown, U.S. job growth — at 1.5 percent — will again exceed Georgia’s,” he said.
The holdup to better growth in Georgia the past four years has been the structure of its economy. Georgia’s job market is more clustered than other states around information technology, air transportation and vulnerable manufacturing industries (e.g., textiles). “All three clusters were ground zero in the 2001 recession,” Benson said. “Other states had economies with different dominant clusters, and so the recession was shallower and they escaped it more quickly than Georgia.” But the positives pushing Georgia’s economy in 2006 still outweigh the negatives, Benson said, identifying five trends bolstering higher growth next year: (1) above-average population growth, (2) strong gains as an exporting state because of the ports in Savannah and Brunswick, (3) substantially higher corporate profits and the reinvestment of those profits, (4) more tourist destinations and convention business, and (5) a turnaround, at long last, in Georgia’s I.T. industry.
Atlanta’s Go-Go Growth Gone for Now – The 28 counties that comprise metropolitan Atlanta will experience 1.8 percent job growth — or about 41,000 new jobs — next year. In spite of a recent string of bankruptcy and buyout headlines involving some of the state’s iconic companies (Delta Air Lines, Georgia-Pacific and Scientific-Atlanta), the city’s prospects are buoyed by strong in-migration and resurgent civic leadership. “We don’t see anything on the economic horizon, however, that is big enough to overcome the sluggishness of several of our larger employers,” Benson said. “Our go-go growth days are behind us. That doesn’t mean that the Atlanta economy won’t grow, but it does mean that the city’s growth rate will probably tend to track the nation’s for the foreseeable future.”
The Supercenter Spiral in Retail – Georgia’s retailers have eliminated more than 26,000 jobs since 2000 — nearly 6 percent of total retail employment. That kind of job loss in retail is unprecedented in Georgia and also seems contradictory to the robust growth in consumer spending during the same period. Benson offered his explanation: Retailers are rolling out “supercenter” store formats that combine the traditional grocery store and discount department store under one roof, which require fewer employees than two stores operated separately. And they’ve proven to be immensely popular with consumers.
“The success of supercenters in Georgia helps to explain the loss of at least 15,000 grocery store jobs,” Benson said. “You can expect WalMart — and others, such as Target — to put even more emphasis on developing supercenters. As a result, we do not expect to see any net job creation in the retail sector in 2006.”
Employment – Since the job market bottomed out in June 2003 — costing Georgia 164,000 lost jobs — the state has been slower to return to pre-recessionary employment levels than the nation. “By last January, the U.S. had fully replaced the jobs it lost in the recession,” Benson said. “As of September, Georgia had recouped only about two out of every three lost jobs. It will take Georgia until at least late 2006 to recover all of its lost jobs. That puts our full recovery nearly two years behind the nation’s recovery.”
The slower pace of job creation in Georgia, combined with the state’s above-average population growth, has led to a higher unemployment rate in Georgia (5.5 percent) than the nation (5.0 percent) ever since May. “That is very unfamiliar territory for Georgia,” Benson said. “It hasn’t happened since August 1989 — 16 years ago.”
Statewide, nonfarm employment will increase by about 53,000 jobs in 2006 (1.3 percent). But Georgia’s unemployment rate, which is forecast to be 5.1 percent next year, will remain stubbornly above the predicted U.S. jobless rate of 4.9 percent.
Turnaround in Information Technology – Georgia’s I.T. employment shrunk by 8.3 percent in 2002, 6.4 percent in 2003, 4.0 percent in 2004, and is expected to decline by 0.6 percent in 2005. In the process, Georgia lost about one out of five tech sector jobs. The good news? “2006 will be the turnaround year,” Benson said. “The downsizing is essentially complete.”
But after so many painful cuts and ongoing competitive pressures, technology companies will be very slow to step up the pace of hiring. “It could take the rest of the decade to recover the 31,000 information jobs lost since 2000,” he said. “Still, we’ll be moving in the right direction for the first time since the dot-com bubble burst.”
Delta Air Lines and General Motors – Both Delta’s bankruptcy filing and the announced closing of GM’s Doraville assembly plant were widely anticipated and already factored into the Selig Center’s forecast. Benson said Delta’s bankruptcy is actually a step forward for Atlanta and Georgia. “It has not been to Atlanta’s advantage to have its largest private employer be an inefficient company that is teetering on the edge of bankruptcy,” he said. Even if Atlanta has to absorb as many as 4,000 job losses from the airline’s restructuring, Benson said, “we believe that Delta’s bankruptcy does not lower the growth trajectory for the Atlanta region.”
Home Sales and Construction – Atlanta’s economic growth depends heavily on residential construction, and homebuilding is about to downshift. Rising mortgage rates, high prices for building materials and less appreciation in housing prices will take their toll on the Atlanta real estate market. On the bright side, there are no signs of a builder-driven oversupply of housing that would lead to an unbalanced buyer’s market in Atlanta.
Hurricane Impact – In Katrina’s immediate wake, high energy prices and uncertainties about fuel supplies rattled consumers and businesses. Looking to 2006, energy prices are “a safe bet” to remain relatively high and consumer confidence is unlikely to recover to pre-Katrina levels. As a result, spending and hiring will be less vigorous than what would have been the case.
Further into next year, the rippling economic consequences of Katrina and Rita will be replaced by more positive outcomes for Georgia. Emigration and business relocations from hurricane-stricken areas will continue to boost the state’s economy. Atlanta will pick up a number of national conventions and trade shows originally scheduled for New Orleans. And Georgia’s ports will take up some of the slack in shipping until the Port of New Orleans reopens.
The National Forecast
At a Glance – Although the Selig Center forecast anticipates continued economic expansion in 2006, the aftermath of Hurricane Katrina will result in moderately slower growth nationally. U.S. economic growth, as measured by gross domestic product, will rise by 3.0 percent next year, which is a decrease from the 3.3 percent growth rate expected for 2005 and the 4.2 percent reported for 2004.
The severe economic damage and extensive disruptions associated with Katrina dramatically lowered GDP growth in the final two quarters of 2005, and diminish the prospects for growth in the first part of 2006. Katrina also reinforced many pre-existing trends that were expected to slow growth next year. Those include more cautious consumer spending for durable goods, a decline in spending for housing, the sting of the Federal Reserve’s interest rate hikes and the unpleasant reality of high consumer-debt levels coupled with virtually no savings.
Working in favor of economic growth in 2006 will be stepped-up spending by federal, state and local governments; a rebound in commercial construction; growth in high-wage jobs; and accelerated business spending for equipment and software. Lastly, by mid-2006 the beneficial economic impacts of hurricane reconstruction should outweigh the lingering negative effects of the storm damage.
Labor Markets – Tracking the slightly slower growth rate in the economy, U.S. nonfarm employment will grow 1.5 percent in 2006, just off the pace of net hiring anticipated for 2005 (1.6 percent). Continued gains in productivity, more outsourcing of blue-collar jobs in manufacturing and white-collar jobs in high-tech and business services, and rising costs for employee benefits are the leading drags on employment growth nationwide. In the coming year, employment will rise fastest in professional services, hospitality and health services.
Inflation and Interest Rates – The signs of reaccelerating inflation are obvious: higher oil prices, the falling dollar, and rising commodity prices are major worries. Core inflation, which excludes food and energy, is gaining momentum, rising from 1.8 percent in 2004 to 2.5 percent in 2005. If oil prices stabilize or decline slightly, core inflation will increase by 2.7 percent in 2006. The Selig Center forecast projects that the Federal Reserve’s funds rate will be raised to 4.5 percent in 2006. This rate increase was expected to happen early in the year, but — after Katrina — it probably will be delayed until mid-year or later.