Rajeev Dhawan, Director, Economic Forecasting Center, J. Mack Robinson College of Business, Georgia State University
ATLANTA—Expect a personal income tax cut and a Federal Reserve rate hike following October debt ceiling deliberations that at times will border on theatrics, according to Rajeev Dhawan of the Economic Forecasting Center at Georgia State University’s J. Mack Robinson College of Business.
“It will first get a bit shaky in October as the debt ceiling debate unnerves the financial markets, but only for a short while,” Dhawan wrote in his quarterly “Forecast of the Nation,” released Aug. 23, 2017. “Having no big legislative victories by then, Congress will tee up a personal income tax cut by Thanksgiving.”
Dhawan pointed to a small personal income tax cut for the middle class that will boost consumption and growth into 2018, followed by an interest rate hike in December.
“You tap the brakes harder only if you are gathering speed,” Dhawan wrote regarding the interest rate hike he anticipates will follow the tax cut. “But, there is one small caveat on which a rate hike hinges: Markets will punish uncertainty surrounding the future head of the Federal Reserve.”
Janet Yellen’s term as Federal Reserve Board Chair ends Feb. 1, 2018.
Rate hikes in 2017 and in the future will dampen interest-rate sensitive sectors, such as housing starts and auto sales, Dhawan said.
“The three rate hikes of the last nine months, coupled with automakers running out of marketing gimmicks, is having its intended impact on this sector,” he said.
As for trade, Dhawan pointed to appreciation of global stock markets as a sign skirmishes won’t come to fruition.
“Markets can live with political dysfunction as long as the playing field rules are not changed capriciously,” Dhawan said. “They are signaling the Trump administration’s rhetoric vs. its actual and projected actions on trade are not matching up.”
According to Dhawan, the lack of tariffs imposed on China suggests the administration is relying on President Xi Jinping to rein in the “real problem child in the geopolitical domain, North Korea.”
As supplier of 90 percent of North Korean imports, China has negotiating leverage with North Korea. That’s why the Trump administration has abandoned tough talk on China and turned its attention to replacing manufacturing jobs in the American Midwest.
“The message is out, and the workforce in the Midwest and other swing states apparently loves it,” Dhawan wrote. “Manufacturing job growth that stalled in 2016 is once again positive.”
In the short term, the forecaster does not foresee much happening regarding infrastructure.
“I do not expect much infrastructure spending in coming years,” Dhawan wrote. “If it happens, it will help growth in 2019 and beyond. The multiplier takes a long time to originate from these types of spending.”
Highlights from the Economic Forecasting Center’s National Report
- Following GDP growth of 2.6 percent in the second quarter of 2017, the economy will expand at 2.1 percent in 2017, 2.3 percent in 2018 and 2.0 percent in 2019.
- Business investment grew 5.2 percent the second quarter of 2017. Expect growth to settle at 4.5 percent in 2017, 4.5 percent in 2018 and 4.0 percent in 2019. Jobs will grow by a monthly rate of 174,000 in 2017, 156,000 in 2018 and 144,000 in 2019.
- Housing starts will average 1.211 million units in 2017, rise to 1.246 in 2018 and 1.280 in 2019. Expect auto sales of 16.8 million units in 2017, 16.4 in 2018 and 16.2 in 2019.
- The 10-year bond rate will average 2.5 percent in 2017, 3.1 percent in 2018 and 3.8 percent in 2019.
Georgia’s Job Growth Expected to Moderate
A strong dollar, trading partner growth woes and factors beyond American borders will continue to have a moderating impact on Georgia’s manufacturing and corporate sector gains, according to Rajeev Dhawan of the Economic Forecasting Center at Georgia State University’s J. Mack Robinson College of Business.
“The slowdown in manufacturing is mostly attributable to external factors,” Dhawan wrote in his quarterly “Forecast of Georgia and Atlanta,” published on Aug. 23. “Corporate payrolls also were shaken by turmoil.”
The corporate sector added 11,100 jobs in the first half of 2017, compared to 20,900 jobs added in the second half of 2016. The manufacturing sector decreased by 3,200 jobs from January through June of 2017. It had added 3,800 jobs in the last half of 2016.
Another catalyst sector, information technology, added 4,100 jobs during the first half of 2017, compared to no gain in jobs during the second half of 2016. Financial services, wholesale trade and transportation also added more jobs from January through June 2017, compared with July through December 2016. Healthcare added fewer jobs over the same period.
“These sectors represent industries with a larger share of Georgia’s higher paying jobs,” Dhawan said. “They added jobs, but at a 10 percent moderation from the last half of 2016.”
During the past two years, hospitality, retail trade and education kept the job creation engine humming despite global headwinds. But, over the first six months of 2017, these sectors added jobs at only half the pace compared to the end of 2016. This is the reason for recent moderation in overall job creation in the Peach State.
As consumers shift away from shopping in brick-and-mortar stores to online retailing, the retail trade employment has suffered, but. the transportation and warehousing sector has gained. Hiring in the education sector is linked to city and local entity tax collection.
To analyze the impact of job creation moderation, Dhawan applied his Triangle of Money concept to create a more complete picture of the quality of jobs added, by reconciling employment signals with income tax collections data and real estate decisions.
“Individual tax revenues in fiscal year 2017 posted a year-over-year increase of 5.2 percent, which is less than the previous fiscal year’s growth of 7.9 percent,” Dhawan said. “Thus, there is a clear moderation in overall growth of individual tax revenues.”
However, sales tax collections are improving because of an increase in construction throughout the state. Dhawan pointed to construction projects in metro Atlanta, Savannah, LaGrange, Columbus, Macon, Dalton and Valdosta as the reason for a boost in sales tax collections.
“Georgia tax revenue growth has moderated,” Dhawan wrote, “with the caveat that sales tax collections had a recent uptick due to ongoing construction activity.”
Multifamily permit activity has sharply moderated as builders focus on units already in the pipeline. Single family permits will continue to increase as interest rates are still low, but lack of affordable lots will keep a lid on growth.
The ongoing moderation is not going to reverse course, as not much improvement is expected in the global economy. Oil prices will remain low and Chinese efforts to manage its runaway debt will produce a slowdown to its supplier nations in the emerging economies.
On the domestic front, it doesn’t seem like any new spending or infrastructure plans are planned for the next six months. There is a good chance income tax cuts geared towards the middle class will help with consumer spending, but will not be enough to overturn the trend of moderation, Dhawan said.
Highlights from the Economic Forecasting Center’s Report for Georgia and Atlanta
- Georgia employment will gain 86,100 jobs (22,300 premium jobs) in calendar year 2017, 72,800 jobs (17,700 premium) in 2018 and 68,300 (16,400 premium) in 2019.
- Nominal personal income will rise 4.6 percent in 2017, 5.3 percent in 2018 and 5.5 percent in 2019.
- Atlanta will add 65,500 jobs (17,400 premium jobs) in calendar year 2017, 51,800 jobs (13,100 premium) in 2018 and 47,200 jobs (11,400 premium) in 2019.
- City permitting activity will drop 6.1 percent in 2017, rise only 0.1 percent in 2018 and 2.3 percent in 2019.