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Who, What and Where — About 1,000 Atlanta executives, government leaders and University of Georgia alumni are registered for the Georgia Economic Outlook luncheon in Atlanta. The Dec. 4th program at the Georgia World Congress Center is the 25th annual economic forecast luncheon hosted by UGA’s Terry College of Business. Speakers include UGA President Michael Adams, Gov. Sonny Perdue, Standard & Poor’s chief economist David Wyss and Terry College Dean Robert 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 2008, there will be no soft-landing for Georgia’s economy. Housing, manufacturing, agriculture and the information sector are already in recession, and downturns in those key industries put the entire state’s economy dangerously close to the tipping point,” according to Dean Robert T. Sumichrast of UGA’s Terry College of Business. “However, we haven’t tipped yet. Our economy is still growing, but what appeared to be a soft landing for Georgia’s economy has morphed into a protracted landing — characterized by considerable turbulence.” The Selig Center, which this time last year put the odds of recession at 25 percent, now estimates the risk of recession in 2008 to be 40 percent. “The only thing standing between us and a recession is one major crisis, or one unexpected shock, or one mistake by the Federal Reserve,” Sumichrast said. “The period of greatest risk is imminent. Georgia’s economy will be most vulnerable in the first and second quarters of 2008. For the next six months, we will be living on the edge.”
What Might Trigger a Recession? The risk of recession is ramping up, Sumichrast said, because of three pressure points that are putting the clamps on growth in Georgia.
1. Housing: Concern for a nationwide housing slump was signaled years ago. The Selig Center predicted a housing downturn two years ago, and housing permits issued in Georgia followed suit, dropping 9 percent in 2006. Last year, the projections were even more dire, and housing permits plunged 40 percent in 2007.
The Selig Center doesn’t expect permits to build new homes in Georgia to turn up until the fourth quarter of 2008. “New home building activity will continue to slide,” Sumichrast said. “From its peak in 2005 until it rebounds, we anticipate a 53 percent drop in activity. So, for homebuilders and others whose livelihoods depend on new home construction, Georgia’s housing recession doesn’t end until late 2008 or possibly early 2009.” The silver lining is that there is no investor-driven price bubble affecting existing homes sales in Georgia. “Home affordability never became as much an issue in Georgia as in other parts of the country,” he said.
2. Energy Prices: Georgia’s economy is very exposed to an oil price shock or supply interruption because global energy markets will remain very tight. Historically, when the U.S. economy slows, the price of crude oil begins to soften. “But that’s not going to happen, at least not in 2008,” Sumichrast said. “Global economic growth is so strong that it will keep crude prices high.”
High fuel prices or a supply interruption will do more damage to Georgia’s economy than it will to many other states. “Our vulnerability stems from the structure of our economy. Georgia, and especially Atlanta, is a major transportation, distribution and logistics center, and these activities are very fuel intensive,” he said. “Right now we have the product, but the price is high. In contrast, no product would mean lines at the pump. Those lines would kill growth.”
3. Drought: With each sunny day, the drought inflicts more damage on a broader range of the state’s water-intensive economic activities. In Atlanta, the drought has already caused recessions in urban agriculture, landscaping and garden centers. A UGA study recently estimated the state’s losses in production agriculture at close to $800 million. “The drought alone will not push Georgia’s economy into recession, but in the tug of war between positive and negative economic forces the drought could tip the balance toward recession.
The Fundamentals — Because of the economy’s protracted landing, economic growth in Georgia is forecast to slow to an inflation-adjusted gross state product of 2.4 percent next year. “That’s not much slower than the 2.6 percent growth that Georgia will post in 2007, but the similar growth rate masks an increased uncertainty,” Sumichrast said. Georgia’s economy is expected to grow faster than the national economy for the third straight year. The Selig Center forecast projects 2 percent growth for the U.S. economy in 2008.
Likewise, the forecast calls for Georgia to outpace the nation in job growth. Georgia is expected to create 44,000 new jobs in 2008, a growth rate of 1.1 percent. That’s down from Georgia’s anticipated 1.3 percent growth this year, but better than the rate of job creation nationally, which will increase 0.8 percent.
Relocation Destination — Slogging through the second straight year of subdued growth nationwide, the business climate will become increasingly cost-conscious. Georgia will be well positioned to vie for corporate headquarters, growth in high-tech and other industry relocations as businesses look to reduce costs. Sumichrast cited two studies supporting this. The first, from KPMG, concluded that Atlanta was the least costly large U.S. city for doing business. And the Boyd Company named Atlanta the second least-expensive major city in which to operate a corporate headquarters. “So, even as the number of economic development projects declines in the typical cyclical fashion, our state’s share of such projects should grow,” he said.
A Boost from China — Three Chinese companies have announced significant direct investments in Georgia since mid-2006 (each bringing between 200 and 600 new jobs). And the prospects for more investments improved when Delta Air Lines was awarded direct service from Atlanta to Shanghai in September. “Meanwhile, the Metro Atlanta Chamber of Commerce is lobbying hard for a Chinese consulate. Establishing diplomatic ties with China would substantially boost Atlanta’s ability to compete for Chinese projects,” Sumichrast said.
Be Ready to React — “Considering the country’s current standing and the three recession triggers for Georgia, my advice is to position your business for continuing economic growth, but be ready to act defensively should economic conditions begin to deteriorate,” Sumichrast advised. “Even though the possibility of recession is high, the odds still favor growth.
The National Forecast
At a Glance — The growth rate of the U.S. economy will continue to shuffle along in 2008. After adjusting for inflation, the nation’s gross domestic product is forecast by the Selig Center to grow 2 percent next year, staying in line with the halting 1.9 percent growth estimated for 2007. Although the pace of growth has slipped below the long-term average growth rate of about 3 percent, it hasn’t cooled enough to fit the definition of a hard landing.
The Selig Center’s baseline forecast assumes several factors will urge the expansion onward in ’08. First, banks are well capitalized and corporate balance sheets are in excellent shape, which will help block the housing recession from becoming an even broader based credit crunch. Second, U.S. export growth will accelerate, but import growth won’t. Consequently, net exports will make a major contribution to GDP growth. Also, business spending for new equipment will continue to grow, and nonresidential construction will hit its cyclical peak in 2008.
What’s missing from the equation, for the first time in many years, is a significant impetus from consumers. “Consumer caution is a major factor behind below-average economic growth,” said Selig Center Director Jeffrey M. Humphreys. “We’re convinced that slower growth in consumer spending is imminent.” Household spending, adjusted for inflation, will advance by only 2.1 percent, compared with 2.7 percent in 2007 and 3.1 percent in 2006. “The slowdown reflects the deepening of the housing recession and substantial home price declines, tighter credit standards, turmoil in the financial markets, the expectation of limited returns in the stock market, and high levels of consumer debt,” Humphreys said.
Corporate Profits Soaring — At the halfway point of this year, corporate profits were 90 percent higher than they were five years ago, which dwarfs the 33 percent increase in nominal economic growth during that same period. But this kind of growth probably can’t be sustained in 2008, and after-tax profits could retrench slightly from their haughty levels. “Profit growth is very sensitive to movements in GDP, and GDP growth will be below average in 2008. Also, the damage the subprime credit crisis inflicts on the profits of banks and others will weigh heavily on the overall profits earned by U.S. companies,” according to the forecast.
International Trade and the Dollar — In 2008, U.S. exports will increase more than twice as fast as imports, so the net effect will be a prime driver of economic growth nationally. And a substantially weaker dollar also will combine to help exports and deter imports. Export growth will be especially strong for aircraft, consumer goods and capital goods, followed by food, beverages and animal feeds.
Facing Down Inflation — Consumer price inflation will increase by 1.9 percent in 2008, down from 2.6 percent in 2007, assuming oil prices stay at current levels. Price inflation seems to have peaked in 2005 and has been moving lower ever since. Primarily, it’s following the course of inflation’s usual drivers: slower overall economic growth, cautious consumer spending, decelerating job growth, unaccommodating short-term interest rates from the Federal Reserve, and plummeting home prices, which in better housing markets is one of the biggest risks to higher inflation.