ATLANTA—A severe lack of investment, especially in technology, explains why gross domestic product (GDP) growth has stalled, according to Rajeev Dhawan of the Economic Forecasting Center at Georgia State University’s J. Mack Robinson College of Business.
“In the current expansion, investment growth has been a paltry 4.1 percent, compared to 10.6 percent in the ’90s,” Dhawan wrote in his quarterly “Forecast of the Nation,” released today (Aug. 24). “No wonder current GDP growth is almost 40 percent less than the 3.8 percent seen in the 1990s.”
Real GDP growth over the past three quarters averaged an anemic 1.0 percent. One year ago, the average for the same three quarters was 2.3 percent.
“We are in the second pause in growth in the current recovery,” Dhawan said. “The first pause began in mid-2012 after the recovery started in mid-2009. In between these two pauses, GDP growth even touched 5.0 percent in mid-2014.”
Dhawan points to political uncertainty as the reason this pause will be more prolonged than the last one.
“This pause will be slightly longer because populist rhetoric in this presidential cycle started earlier than usual and has been much, much stronger,” he said. “When we marry this mood with the drop in equipment spending due to collapsing oil prices, clumsy efforts by China to devalue its currency in order to boost growth via exports and frugal consumers worldwide, the result is a growth pause.”
The end of this election cycle should mark the end of this growth pause, Dhawan said.
“Like after the last presidential election, we have a good chance of bouncing back when this one is over,” Dhawan wrote in his forecast.
The current stock market surge indicates the exchanges are betting on no change in the political party of the president. However, Dhawan points out that markets react poorly when surprised.
“No one knows what the results of the election will be, but we do know how markets react when their herd mentality forecasts the wrong outcome of political events,” Dhawan said. “In June, the Brexit referendum (for the United Kingdom to leave the European Union) didn’t go the way the U.S. stock market anticipated and its reaction was that of a petulant child whose favorite blanket was snatched away.
“In the short run, the flight to safety (lower interest rates boosting consumption) and the negative wealth impact from the drop in financial markets tend to offset each other.”
The uncertainty of when the United Kingdom will invoke article 50 to begin its withdrawal from the European Union will push most of the economic impact to the medium or long term. Dhawan predicts the maximum hit to the U.S. economy will be a negative 0.3 percent impact on GDP growth.
Global Woes Set to Impinge on Georgia’s Growth
Despite strong domestic consumption, Georgia’s dependence on the global economy is set to make an impact on the state’s growth, according to Rajeev Dhawan of the Economic Forecasting Center at Georgia State University’s J. Mack Robinson College of Business.
“Our manufacturers and exporters sent almost $40 billion of goods to the global marketplace last year, and three-quarters of the state’s 18 Fortune 500 companies operate on a global scale,” Dhawan wrote in his “Forecast of Georgia and Atlanta,” released today (Aug. 24). “Not only the Brexit decision (for the United Kingdom to leave the European Union) but also overall global economic health issues, such as China’s stalled economy and oil-driven budgetary constraints in the Middle East, are key factors in our domestic-led growth.”
The U.S. economy expanded at a weak 1.2 percent in the second quarter of 2016. However, domestic consumption grew a strong 4.2 percent.
“The U.S. economy stood on shaky ground in the second quarter with a good pace of consumption,” Dhawan said. “This came in the context of an anemic investment climate and one primary growth source. The uncertainty of Brexit adds to this weak investment environment.”
This could have some impact as the United Kingdom is the Peach State’s fourth largest trading partner. But the European Union as a whole accounts for 15 percent of state exports (excluding the United Kingdom) and its health matters more.
“With the EU already on fragile footing,” Dhawan said, “the U.K.’s eventual exit could push their economic activity lower and affect the importing capabilities of its countries. However, the drop in exports to Canada, China, Singapore, Brazil and Japan (accounting for more than 33 percent of state exports) will have greater impact.”
Uncertainty caused by Brexit and global struggles hasn’t been all bad, though, Dhawan said. One Georgia catalyst sector, corporate, is benefitting from the flight to safety of international investors, creating a net-positive effect of cash flow. As a result, the corporate sector created 16,500 jobs in the first half of the year, just off pace for the last half of 2015.
Another Georgia catalyst sector, manufacturing, did not fare as well despite benefitting from the state’s lack of dependence on shale oil and gas activity. This sector created only 800 new jobs in the first half of the year.
By contrast, the construction sector benefitted from a surge in permits for the first half of 2016.
“An increase in residential permit activity, combined with a sustained level of commercial and industrial construction, saw good job gains in Georgia’s construction industry.” Dhawan said, although it’s a trend he does not expect to continue.
“Going forward, expect a deceleration due to several factors. One is slowing personal income growth, which affects purchasing power,” Dhawan said. “Another is the fact that a large chunk of this activity is being generated in a relatively small area, with land availability becoming an issue.”
Construction isn’t the only sector Dhawan expects to slow, advising that instead of mechanically counting the number of jobs added the focus should be on their quality and purchasing power instead.
“The quality of jobs being created now is less than before, and the income pinch on catalyst sectors (for example, corporate and manufacturing) has a trickle-down effect that leads to weak job growth in the tertiary sectors of retail trade and hospitality, as well as an overall lessening of job growth,” Dhawan said. “Growth is unable to get into the next gear, and even maintenance might be tough.”
Georgia State Featured Researcher
Economic Forecasting Center
J. Mack Robinson College of Business
One of the country’s leading economists, Dhawan’s business cycle research analyzes the impact of monetary policy changes on the growth and survival of small firms and his industrial organization work quantifies the contribution of organizational and technological factors in improving firm efficiency.