Georgia State: Shocks Put Economy On Lowered Growth Path, Despite Expected Federal Reserve Cuts

Staff Report From Georgia CEO

Thursday, August 29th, 2019

Trade tensions, a reduction in business investment and an earlier than usual presidential election swoon are contributing to a lowered growth path for 2020-21, according to Rajeev Dhawan of the Economic Forecasting Center at Georgia State University’s Robinson College of Business.

“Economic growth will take an oscillatory path, known as transition economics, to reach this lower level,” Dhawan wrote in his “Forecast of the Nation,” released today (Aug. 28).

“There is never a single reason for a downgrade, but the chief culprit for this one and its zigzag is the evolution of business investment from mid-2018 until now,” Dhawan said. “Investment contractions are a bad sign for future growth unless there are mitigating circumstances.”

One such mitigating circumstance affecting equipment investment was the March grounding of Boeing’s 737 MAX, which has spread downstream to suppliers such as General Electric (engines) and numerous parts makers across the country.

“This investment category will rebound at some point, but don’t count on help from those parked planes before early next year,” Dhawan said.

Also in retreat: investment spending on structures (commercial buildings, mining and fracking wells) dropped 10.6 percent in the second quarter of the year.

“The commercial sector seems to be pulling back on its building desire, despite good consumer spending,” Dhawan said. “The reason is the future seems more uncertain today than a year ago, when tariffs were a negotiating ploy and not a reality, as they are now.”

As for fracking, low oil prices are keeping well below the breakeven price per barrel, which Dhawan attributes to lowered demand from China.

“It seems unlikely that U.S.-Chinese trade tensions will ratchet down anytime soon,” he said. “And corporations, with their globally integrated supply chains, are spooked by the tit-for-tat tariff game. Thus, investment is not expected to rebound to its high of mid-2018 following the December 2017 tax cuts.”

Dhawan expects the Federal Reserve will cut rates in September, and then pause to observe concrete evidence of the anticipated growth slowdown. He then expects the Fed will decrease rates again in December, leading to a limited boost in home refinancing activity.

“A sharp drop in the 10-year bond rate since the Fed’s rate cut of July 31 is mostly due to global capital seeking a safe haven,” Dhawan said. “What cannot be forecast is when this fear-motivated flight to safety will end. If the move to 10-year bonds persists it will further depress the growth trajectory and keep the yield curve inverted even longer, which would require deeper (emergency) rate cuts by the Fed.”

Highlights from the Economic Forecasting Center’s National Report

Overall GDP growth will be 2.3 percent in 2019, 1.7 percent in 2020 and 2.0 percent in 2021.

Investment growth will be 2.9 percent in 2019, 1.7 percent in 2020 and then rise to 3.2 percent in 2021. Monthly job gains will moderate to 153,000 in 2019, drop to 118,600 in 2020 and gain 116,900 new monthly jobs in 2021.

Housing starts will average 1.225 million in 2019, 1.228 million in 2020 and then increase to 1.265 million in 2021. Vehicle sales will average 16.7 million in 2019, 15.9 million in 2020 and 16.0 million in 2021.

The 10-year bond rate will average 2.1 percent in 2019, 2.2 percent in 2020 and rise to 2.5 percent in 2021.

Global Economic Woes Contribute to Continued Economic Moderation in Georgia

Stuttering global growth and escalating trade tiffs that are affecting national economic prospects are also being felt in Georgia across many employment sectors, according to Rajeev Dhawan of the Economic Forecasting Center at Georgia State University’s Robinson College of Business.

In his quarterly “Forecast of Georgia and Atlanta,” released today (Aug. 28), Dhawan wrote that he expects two Federal Reserve rate cuts before the end of 2019, asking, “Will these extra cuts help us negate the fallout from our trade spats? And what relief will it provide at the state and Atlanta metro levels?”

The forecaster’s answer to these questions is mixed. Yes, lower rates should help with interest-sensitive sectors such as home refinancing, vehicle sales and small business loans.

“But, these rate cuts cannot overcome the hesitation of big corporations to undertake the capital expansions that determine future job growth,” said Dhawan. “These firms are global in scope and dependent on external markets for a big proportion of their revenues.”

A case in point is Delta Air Lines. The state’s largest corporate employer collects 30 percent of its passenger revenue from international operations. In the second quarter of 2019, its global sector grew by 5.2 percent, compared to 8.7 percent for the same period in 2018.

The Port of Savannah, another transportation crown jewel, is largely responsible for driving the economic growth of the Savannah metro area. In mid-2018, Savannah’s job growth was 2.7 percent, outpacing the state’s job growth rate of 1.9 percent when global trade volumes were good. But by June 2019, Savannah’s growth rate dropped to 1.2 percent, putting it below the state’s 1.7 percent growth as the global economy cooled.

“Globally connected sectors and areas grow higher than average when the world economy is booming, but they decelerate sharply when the tide turns,” Dhawan said.

The global health of Fortune 500 companies headquartered in Georgia determines the hiring of managerial jobs in Atlanta, which has a multiplier effect on downstream sectors.

Domestic demand sectors are performing better than globally connected ones, particularly hospitality (historically high occupancy rates), education (growing due to population growth), healthcare (overall population growth and aging) and construction (new hotel, office and apartment developments).

“Fed rate cuts will alleviate the pain somewhat, and relatively clear skies will emerge, but without a rainbow,” said Dhawan.

Highlights from the Economic Forecasting Center’s Report for Georgia and Atlanta

Georgia employment will add 65,200 jobs (11,400 premium jobs) in 2019, gain 53,500 jobs (9,400 premium) in 2020 and increase by 48,200 (9,700 premium) in 2021.

Nominal personal income will grow 4.3 percent in 2019, then increase by a better 5.1 percent in 2020 and 2021.

Atlanta will add 45,300 jobs (7,900 premium positions) in 2019, moderate to 37,900 jobs (7,200 premium) in 2020 and 35,600 jobs (7,300 premium) in 2021.

Atlanta housing permitting activity will fall 18.9 percent in 2019, decline 6.0 percent in 2020 and fall another 3.0 percent in 2021.