Report Finds ‘Great Disconnect’ in Economy

ATLANTA – It’s a study in economic contrasts. The Dow Jones industrial average is up almost 20 percent in the six months since the November elections, housing starts are steadily rising, home prices are appreciating and inventory is tight in all 50 states.

On the other hand, political dysfunction (the sequester and expiration of the payroll tax cut) has spurred consumers to be cautious spenders, especially on discretionary items, bleak international conditions are depressing exports and revenue growth at the companies that make up the Dow index is “lackluster,” according to Rajeev Dhawan of the Economic Forecasting Center at Georgia State University’s Robinson College of Business.

“Economically speaking, we are way beyond the red line,” Dhawan writes in his quarterly “Forecast of the Nation,” released today. “We have no reason to expect the forecasted acceleration in the economy in 2013,” says Dhawan, who refers to the current dynamics as “the Great Disconnect.”

Dhawan attributes the disconnect between stock price and revenue growth to an anticipated increase in demand.

“The fundamental factor for explaining the market’s rise is always future growth in profits that arise from a strong performance in revenues,” he says.

Will revenue growth go from the current levels (-3 percent) to the solid performance of a year ago (9.4 percent)? If current job growth (a 200,000 pace in the past six months) accelerates, creating additional demand for products, then yes. But this is predicated on expanded payrolls in response to an anticipated increase in demand, creating what Dhawan characterizes as “a chicken and egg problem.”

Regarding the prospects for the next few years, Dhawan is optimistic a battle-fatigued Congress will by late fall reach a budget deal that will be a down payment on deficit reduction. Such a deal also will provide corporations with a measure of certainty about their tax rates for the next few years, spurring a higher rate of investment to produce expansion and jobs at stronger rates in 2014 and 2015.

“This outcome will make for a strong, self-sustaining recovery,” says Dhawan.

Dhawan says home prices will continue to climb.

“As money flows throughout the system, young people with jobs who have been living with their parents are ready for their own place, even a rented one,” Dhawan says. The forecaster says commercial real estate prospects “remain a function of the strength of future job growth, period.”

The Economic Forecasting Center’s National Report

  • Real GDP grew 2.5 percent in the first quarter of 2013, but will grow only 1.5 percent in the second half, for an annual average of 1.6 percent. Real GDP will expand at 2.0 percent in 2014 and at a strong 2.9 percent in 2015.
  • Private fixed investment will grow only 4.3 percent in 2013, expand by 5.5 percent in 2014 and increase by a strong 7.7 percent in 2015. In 2013, the labor market will add 130,000 jobs per month on average, which will improve to 160,000 jobs per month in 2014 and to 230,000 jobs per month in 2015. However, unemployment will not drop below 7 percent until late 2015.
  • Housing starts will average 0.988 million units in 2013, and gradually rise to 1.267 million units in 2015. Auto sales will average 14.9 million units in 2013, improve to 15.4 million units in 2014 and average 15.9 million units in 2015.
  • The 10-year bond rate will rise to 2.5 percent by mid-2014 and cross the 3 percent threshold by the end of 2015. Inflation will remain below 2.0 percent through 2014, and then rise to 2.2 percent in 2015.

Georgia Will Joust With Economic Headwinds in 2013

Economic recovery forces have taken hold in Georgia, according to Rajeev Dhawan of the Economic Forecasting Center at Georgia State University’s J. Mack Robinson College of Business, as evidenced by 68,400 new jobs in 2012, a surge in housing permits and a reduction in home inventory that has boosted Atlanta metropolitan area home prices.

“Georgia’s job growth rate has been better than that of the nation for the past six months, and the drop in the unemployment rate also has been notable,” Dhawan writes in his quarterly “Forecast of Georgia and Atlanta,” released today.

But the forces powering Georgia’s recovery are not without opposition. Just as the slowing global economy, a rollback in consumer spending due to the expiration of the 2 percent payroll tax cut and low corporate morale due to haphazard sequester cuts are affecting the U.S. economy, they will take a toll on Georgia too.

“These are national headwinds, to which there is no regional counteraction,” Dhawan says.

For example, the impact of spending cutbacks by consumers and their ongoing caution, which began last fall, is seen in Georgia’s sales tax revenue collections (gross terms), which grew by only 0.4 percent in the last 10 months of fiscal 2013.

“That’s a far cry from the 5.3 percent growth we had in fiscal 2012,” says Dhawan.

Consumers are not alone in feeling the pinch.

“Corporations are battling increasing global headwinds from a recessionary Europe, an unstable Middle East and a stalled China, among others,” says Dhawan.

A bellwether, says the forecaster, is Delta Air Lines. In its April 24 quarterly report, the carrier showed revenue growth of only 1.0 percent, with its international segment revenue dropping by 3.0 percent.

Trouble on the international front is evident in Georgia’s export figures as well. In 2011, when China grew strongly and European debt problems were confined to the periphery, state exports grew by a stellar 20.1 percent. The growth rate plunged to 3.2 percent in 2012, and hasn’t picked up in 2013.

“All of the Fortune 500 companies headquartered in Atlanta will face this international headwind,” Dhawan says.

As recovery forces battle these headwinds, Georgia’s economy will still add 63,300 jobs in 2013, slightly lower than the 2012 number, with sectors such as hospitality, retail trade, manufacturing and transportation bearing the brunt of this easing.

“Looking ahead to 2014 and 2015, the headwinds will subside as the global economy picks up (led by China), and Congress reaches a somewhat palatable budget deal (end of 2013), jumpstarting corporate investment that accelerates job growth,” says Dhawan.

Report Highlights for Georgia and Atlanta

  • Georgia employment grew by 68,400 in calendar year 2012. In calendar year 2013, jobs will grow by 63,300, of which 14,800 will be premium jobs. In 2014, the state will add 76,500 jobs (21,000 premium jobs) and in 2015, job numbers will be even stronger at 94,400 (22,900 premium jobs).
  • State unemployment will average 8.6 percent in 2013, drop to 8.3 percent in 2014, and drop further to 7.6 percent in 2015. Nominal personal income will rise by 2.5 percent in 2013, but get to 5.0 percent plus in 2014 and 2015.
  • In calendar year 2013, Atlanta will gain 46,300 jobs, including 9,600 premium jobs. In 2014, Atlanta will add 53,800 jobs, including 14,000 premium jobs. Atlanta employment will grow strongly in calendar year 2013, gaining 61,700 jobs of which 16,800 will be premium jobs.
  • Atlanta’s housing permits in 2013 will increase by 30.2 percent, with multifamily permits growing by 31.6 percent. Permitting activity will grow by 12.4 percent in 2014 as multifamily activity moderates to 16.4 percent. Permit activity picks up in 2015 to 24.9 percent. This year total housing permits will be about 26,000 units, higher than the levels seen in 2008.


Jenifer Shockley
Robinson College of Business
O: (404) 413-7078

May 22, 2013