Economy to Bounce Back in Second Quarter

Georgia State’s Dhawan Expects Economy to Bounce Back in Second Quarter

Rajeev Dhawan of the Economic Forecasting Center at Georgia State University’s J. Mack Robinson College of Business.

Rajeev Dhawan of the Economic Forecasting Center at Georgia State University’s J. Mack Robinson College of Business.

ATLANTA – Real GDP grew at a paltry 0.2% for the first quarter of 2015, but Rajeev Dhawan of the Economic Forecasting Center at Georgia State University’s J. Mack Robinson College of Business doesn’t think the factors that drove this stagnation are here to stay. “After I read the GDP report, the word WOW escaped my lips,” Dhawan wrote in his Forecast of The Nation, released today. “WOW here stands for weather, oil and the world economy. The report showed clear damage from these three factors.”

Unusually cold weather in the Northeast drove nondurable goods consumption growth down to negative 0.3% (especially grocery purchases) in the first quarter. On the flip side, spending on utilities (heating) rose, but overall gasoline savings were socked away. Dhawan says that the weather factor is temporary, except for the Western drought, but the low oil price will start to creep up as U.S. fracking production declines. “We’ve almost reached the bottom, with oil rig counts having dropped sharply with only a little bit to go,” wrote Dhawan. “But prices will not reach the heights of $120 a barrel anytime soon. I expect oil to start creeping up to $70/barrel by year’s end and stay in that range for the coming year.”

The final contributing factor, the world economy, is facing problems on two fronts. First, China’s economy has failed to recover after a planned slowdown to curb inflation, affecting the emerging economies in particular because of supply chain connections. Second, the eurozone is encountering a strange situation of negative government bond yields due to repeated threats of Grexit (Greece leaving the eurozone) and the trillion dollar bond-buying program of the European Central Bank.

Overall, these issues showed up domestically by contributing to a 7.2% decline in exports. “The three components of WOW shaved off close to 2.5% of U.S. growth in the first quarter,” Dhawan said. He believes these negative effects can be offset as the country rebounds in the second quarter. “Weather is a temporary factor. As the seasons progress, it will soon reverse course and add to nondurable consumption. Most of the numerical damage to the GDP is now behind us.” Another side effect of the stagnant first quarter GDP result is the delay in a potential Federal Reserve interest rate hike.

“Oil, the global economy and investment should have stabilized by the end of October,” Dhawan wrote. “This means that December is the earliest the Fed can raise rates.”

Highlights from the Economic Forecasting Center’s National Report

  • Following a gain of 2.4% in 2014, real GDP grew at a stagnant 0.2% in the first quarter of 2015. Growth of 3.3% is expected for the second quarter, bringing the overall rate to 2.5% for 2015. It will expand at a better rate of 2.8% in 2016 and grow 2.7% in 2017.
  • Business investment will grow a weak 3.2% in 2015, recover to 5.8% in 2016 and 6.4% in 2017. Expect jobs to grow by a monthly rate of 254,000 in 2015, 240,000 in 2016 and 232,000 in 2016.
  • Housing starts will average 1.107 million units in 2015, rise to 1.194 in 2016 and 1.253 in 2017. Expect auto sales of 16.8 million units in 2015, 16.9 in 2016 and 17.1 in 2017.
  • The 10-year bond rate will average 2.1% in 2015, and should rise to 3.3% before the end of 2017.

Georgia Posting Good Job Numbers but Not the 90s Purchasing Power Punch

Despite an upward benchmark revision to the 2014 job addition number, 101,900 to 145,000, Georgia is adding jobs that don’t produce the consumers’ purchasing power of yore, according to Rajeev Dhawan of the Economic Forecasting Center at Georgia State University’s J. Mack Robinson College of Business.

“Georgia’s gain of 145,000 jobs in calendar year 2014 is impressive,” Dhawan said. “However, those 145,000 jobs being created aren’t giving the economy nearly as big of a bang for its buck as it did back in the 1990s when slightly fewer jobs, but with greater purchasing power, were created.” During those glory days of the 1990s, one-third of the jobs were high-paying, resulting in a tax revenue growth of 7.1%. Now, one-third of the jobs are in the low-paying category that resulted in a tax growth of only 5.5% in 2014. “These growth rates may be lower than the growth we’ve seen in previous expansion periods,” according to Dhawan. “However, they are still good and a welcome sign in this economic recovery.”

These positive signs are seen in one of the premier catalyst sectors. Local corporate firms made announcements that will enhance future purchasing power, including 900 jobs at Kaiser Permanente and Comcast’s addition of 1,000 jobs to fill their nine-story tower to be built near the new Braves stadium. Dhawan expects strong results from the information and technology sector due to a string of recent job announcements from Amazon Web Services, PureCars, Mobinteg, Cisco, Amtrak, Southern Company and Applied Systems. “This is good news to the future purchasing power potential because these jobs, after all, are high-paying,” Dhawan said.

Not all of the announcements to come from local companies have been on the positive side. In the manufacturing sector, Tyson Foods revealed plans to close their Buena Vista plant at the end of May and cut the third shift at their Dawson plant resulting in 260 job losses. Continuing headwinds from the global economy are dragging the manufacturing sector down including Tyson Foods, but domestic consumption has carried the transportation sector.

According to Dhawan, “Job creation in the transportation sector was the strongest since 1998 due to robust domestic spending.” Harsh winter weather in the northeast slowed hiring in the first quarter of 2015, but low fuel prices should allow the industry to hire in the coming quarters.

Construction workloads will remain heavy in the state. Many big projects are already on the dockets, like the Braves and Falcons stadiums and the Savannah port expansion. In addition, new announcements of hotels will combine with the building of new headquarters across the region which will keep construction jobs robust over the forecast period. The continuation of healthcare employment growth in the coming years will also boost state job totals, after benchmark revisions revealed the ‘missing’ healthcare jobs.

Overall, Dhawan expects stronger gains in catalyst sectors going forward with significant job growth in the sectors of business services, information and healthcare. The Georgia economy will add jobs in 2015 at a growth rate of 2.9%, with 27.8% coming from the premium category.

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

  • Georgia’s job creation slowed to 1.8% for the first quarter of 2015. Expect a job growth rate of 2.9% in 2015, which moderates to 2.3% in 2016 and 2.2% in 2017.
  • Nominal personal income will increase 4.7% in 2015, 5.2% in 2016 and 5.8% in 2017.
  • Strong employment growth continued in Atlanta, growing by 2.9% in the first quarter of 2015. Expect a job growth rate of 3.4% in 2015, a strong 2.7% in 2016 and 2.6% in 2017.
  • Atlanta’s housing permits increased 3.5% over the first quarter of 2015 compared to the same period in 2014. For the year of 2015, permitting activity will increase 6.4%. Permit activity will grow 11.5% in 2016 as multifamily permits return to positive growth and 6.1% in 2017.