Dr. Rajeev DhawanDirector

Office: 404-651-3291Office: 404-651-3291email: forecast@gsu.eduemail: forecast@gsu.eduhttp://www.robinson.gsu.edu/efchttp://www.robinson.gsu.edu/efc

ECONOMIC FORECASTING CENTER

Presented at theAtlanta Economics Club Luncheon

MeetingSeptember 20th, 2005

GLOBAL ECONOMIC OUTLOOKGLOBAL ECONOMIC OUTLOOK

Anonymous VentorAnonymous Ventor

My girlfriend demanded that Itake her to someplace expensive,

Source: AJC, April 21st, 2005

so I took her to a gas station

KATRINA

Source: The Atlanta Journal-Constitution, September 4 th, 2005

Impact of Past Hurricanes

Name Date States Impacted Personal Income Growth

Before

Q2

After

Q3 Q4

Hugo 1989 Sept South Carolina

North Carolina

3.2

5.3

-19.3

-1.0

40.6

10.8

Andrew 1992 Aug Florida

Louisiana

5.1

7.6

-12.7

0.3

37.8

12.2

Floyd 1999 Sept North Carolina 4.2 -1.1 12.5

Charley Frances Jeanne

2004 Aug-Sept

Florida 9.1 2.5 14.8

Ivan 2004 Sep Alabama 7.9 2.2 10.3

Areas Affected by Hurricane KatrinaAreas Affected by Hurricane Katrina

City Population EmploymentPersonal Income

Wages & Salaries

In Thousands (2004) In Billions $

New Orleans 1,315.8 615.6 39.6 21.1

Mobile 399.9 170.8 9.3 5.5

Gulfport-Biloxi 249.7 113.5 6.5 3.8

Pascagoula 154.3 53.6 3.8 1.8

Houma 197.6 81.9 5.0 2.7

Hattiesburg 128.3 54.8 3.0 1.5

Total 2,445.6 1,090.2 67.1 36.4

% of US 0.8% 0.8% 0.7% 0.7%

Source: Bureau of Labor Statistics, Bureau of Economic Analysis

Calculating the Impact of Hurricane Katrina

1. Refinery damage affects gasoline supply until mid September, prices fall only a few weeks after that; $3.00+ per gallon price remains for the next one month; High gas price affect discretionary consumer spending

2. Consumer confidence slips in September and October (refugee crisis + high gas) but recovers by early January as rebuilding begin in New Orleans

3. Ports, refineries, oil and gas pipelines fully operational by January

4. FED keeps on its “measured” hike path to combat inflation caused by Katrina.

5. 10-Year Bond remains low as flight to quality persists giving a break to consumers

IVIIIIIIIVIIIIIIIVIII200720062005

75

70

65

60

55

50

45

40

($/bbl)Impact of Katrina on Oil Price

Baseline Katrina

Gas Prices Remain in the $3 Range

IIIIVIIIIIIIVIIIIIIIVIIIIII2005200420032002

280260240220200180160140120

10.0

8.0

6.0

4.0

2.0

0.0

(Bil.$) (%)Gas Spending Dings Discretionary Expenses

Spending on Gasoline (Left)Growth in Food, Clothing & Shoe Spending (Right)

But Tax Cuts Have Eased the Oil Price Shock this Time

Average Effective Income Tax RatesFederal, State and Local Combined

20%

22%

24%

26%

28%

19

73

19

74

19

75

19

76

19

77

19

78

19

79

19

80

19

81

19

98

19

99

20

00

20

01

20

02

20

03

20

04

Past Oil Price Shock came when tax rates were rising rapidly

Bush Tax cuts have absorbed energy price shocks

Source: Prof. Larry J. Kimbell, Nov. 2004

IVIIIIIIIVIIIIIIIVIII200720062005

96

94

92

90

88

86

84

(Index 2000=100)Impact of Katrina on Consumer Sentiment

Baseline Katrina

Confidence Drops by 10% in Coming MonthsIt Recovers as New Orleans Gets Dry by 06q1

IVIIIIIIIVIIIIIIIVIII200720062005

1.95

1.90

1.85

1.80

1.75

1.70

1.65

1.60

(Mil.)Impact of Katrina on Housing Starts

Baseline Katrina

IVIIIIIIIVIIIIIIIVIII200720062005

18.5

18.0

17.5

17.0

16.5

16.0

(Mil.)Impact of Katrina on Auto Sales

Baseline Katrina

IVIIIIIIIVIIIIIIIVIII200720062005

5.7

4.7

3.8

2.8

1.9

0.9

0.0

(% Ch.)Impact of Katrina on CPI Inflation

Baseline Katrina

IVIIIIIIIVIIIIIIIVIII200720062005

5.6

5.4

5.2

5.0

4.8

4.6

4.4

4.2

4.0

(%)Impact of Katrina on 10-Year Rate

Baseline Katrina

Minor Drop!

Inflation Kicks up InitiallyWhich Keeps the FED Aggressive

Liquidity Motive Drops 10-Year Bond Rate

Bigger ImpactOn Housing

IVIIIIIIIVIIIIIIIVIII200720062005

4.5

4.0

3.5

3.0

2.5

2.0

1.5

(% Ch.)Impact of Katrina on GDP Growth

Baseline Katrina

Initial Drop in Growth: 0.6% in 2nd Half of ‘05Strong Recovery in 2nd Half of ’06

Almost Makes up for Prior Losses!

Change In 2005Q3 2005Q4 2006Q1 2005 2006

GDP Growth -0.7% -0.9% -0.5% -0.2% -0.2%

Cons. Growth -0.5% -0.5% -0.8% -0.1% -0.3%

Employment -51K -310K -499K -90K -363K

10-Year Bond -0.3 -0.3 -0.3 -0.2 -0.1

Housing Starts

-4.8% -10.9% -6.0% -3.8% -3.9%

Auto Sales -0.6% -1.2% -2.4% -0.6% -1.8%

National Impact of Hurricane KatrinaChange from Base Forecast

Source: EFC Calculations

US Sector or Area Grade

Construction A++

Tax Collections A+

Real Dividend Growth A+

Bank Loan Activity A+

Corporate Revenue Growth A

Health/Finance/Insurance Jobs A

Weak Dollar (Earnings) B+

Overall Job Growth B+

Euro Zone Malaise C

Oil Prices D

Benefit/Health Costs D

Manufacturing Jobs D

Auto Over-Capacity F

Iraq/Terrorism F

The Good, the Bad, and the Ugly

Overall US Economy A-

654321

100

90

80

70

60

50

40

30

Bursting BubblesDow (2000-2005) vs. Nikkei (1990-2005)

Dow Jones

Nikkei

High Trade Deficit Numbers Keep US Long Term Bond Rates Low!

Countries 1996 2003

Industrial 46.2 -342.3

United States -120.2 -530.7

Japan 65.4 138.2

Euro Area 88.5 24.9

France 20.8 4.5

Germany -13.4 55.1

Italy 39.6 -20.7

Spain 0.4 -23.6

Other 12.5 25.3

Australia -15.8 -30.4

Canada 3.4 17.1

Switzerland 21.3 42.2

United Kingdom -10.9 -30.5

Countries 1996 2003

Developing -87.5 205.0

Asia -40.8 148.3

China 7.2 45.9

Hong Kong -2.6 17.0

Korea -23.1 11.9

Taiwan 10.9 29.3

Thailand -14.4 8.0

Latin America -39.1 3.8

Argentina -6.8 7.4

Brazil -23.2 4.0

Mexico -2.5 -8.7

Middle East and Africa 5.9 47.8

E. Europe and ex-USSR -13.5 5.1

Global Current Account Balances Global Current Account Balances (Billions of U.S. Dollars)(Billions of U.S. Dollars)

Source: Remarks by Governor Ben S. Bernanke, March 10, 2005

Trade in Goods and Services U.S. Treasury Securities Holdings Currency

As of 2004 Change As of 2004 Change Appreciation

Japan -75.2 -9.3 702 353.7 4.3

China -162 -38.1 196 49.4 0.0

South Korea -19.8 -6.9 67.1 8.6 13.4

Taiwan -12.9 1.2 59.1 18.2 6.7

Hong Kong 6.5 1.8 52.9 22.7 0.0

Singapore 4.3 2.9 26.9 4.1 4.1

 

Germany -45.8 -6.6 59.5 19.5 8.0

UK -10.4 -1.7 171 124.0 7.1

* All numbers are in billions of U.S. dollars

Trade and Holding of US TreasuriesTrade and Holding of US Treasuries by Central Banksby Central Banks

Source: BEA (Trade) and US Treasury Department

Japan -75.2 -9.3 702 353.7 4.3

South Korea -19.8 -6.9 67.1 8.6 13.4

UK -10.4 -1.7 171 124.0 7.1

In one year Japanese Bought $350+ Bil. worth of Treasuries to

Keep their Currency from Appreciating

2004 US Balance in International Trade2004 US Balance in International TradeWhat What TheyThey Buy From Buy From Us*Us*

Airplanes 13.2

Chemicals (Plastic) 10.9

Airplane parts 10.5

Soybeans 6.6

Corn 6.0

Wheat 5.0

Scientific Instruments 4.5

Cotton 4.2

Metal ores 3.2

Animal Feeds 3.0

What What WeWe Buy From Buy From ThemThem

Crude Oil -135.7

Vehicles -123.2

Clothing -67.9

Home Electronics -67.8

Office Electronics -65.6

Petroleum Preparations -28.3

Furniture and Bedding -23.7

Natural Gas -21.1

Electrical Machinery -20.2

Toys, Sporting good -19.1

* Billions of Dollars

Source: US Bureau of Economic Analysis

2002 Passenger Car Production and Sales

Country Production Sales Deficit/Surplus

Japan 8,117,563 4,289,683 3,827,880

Germany 5,301,189 3,341,718 1,959,471

U.S. 4,879,119 8,422,625 -3,543,506

France 3,181,549 2,254,732 926,817

S. Korea 2,471,444 1,065,161 1,406,283

Spain 2,211,172 1,437,192 773,980

Brazil 1,495,622 1,295,119 200,503

U.K. 1,492,365 2,458,769 -966,404

Canada 1,274,853 868,188 406,665

Mexico 1,000,715 667,565 333,150

China 703,521 780,604 -77,083

India 573,808 601,321 -27,513

Sweden 251,035 246,581 4,454

Source: Ward’s World Motor Vehicle Data

Is GM Just in Business to Is GM Just in Business to Service Their Workers’ Pension Plans? Service Their Workers’ Pension Plans?

Source: Dhawan and Lieberman (2002), forthcoming in Management Science

What’s the Solution? What’s the Solution? 1. Dhawan & Lieberman (2002) Study

– Increase Volume/Plant by Adopting Toyota’s JIT Practices

2. Negotiate with Unions

3. Bring Back Some Creative Designing

4. Issue to Top Management & Workers 30-Year Company Bonds as Part of their Compensation (with Restrictions on Re-sales)

10-Year Bond Rate and Trade Deficit

CPI Inflation 2.7 3.5 3.0 1.8

10-Year Bond Rate 4.3 4.3 4.9 5.5

Core 1.8 2.3 2.2 2.0

Source: May 2005, Forecast of the Nation

10-Year Bond Regression10-Year Bond Regression

Greenspan’s DilemmaFundamental Pressures Handicaps

Incipient Inflation

Productivity Worries

Faster Job Growth

Super Hot Housing

Financial Fragilities

Wild Card

Source: Business Week, July 5, 2004

MSA 1-Year 1-Qtr 5-Year

1. Las Vegas, NV 36.23 1.67 84.09

2. Bakersfield, CA 30.46 5.15 92.41

3. Reno-Sparks, NV 30.09 4.52 79.48

4. Riverside-San Bernardino-Ontario, CA 29.58 3.83 112.14

5. Visalia-Porterville, CA 27.23 3.97 67.44

6. Palm Bay-Melbourne -Titusville, FL 26.25 3.79 85.86

7. Salinas, CA 25.71 3.28 116.19

8. Los Angeles - Long Beach - Glendale, CA 25.19 2.73 102.73

9. Fresno, CA 25.10 3.99 103.49

10. Santa Barbara - Santa Maria-Goleta, CA 24.98 3.21 121.06

11. Santa Ana-Anaheim-Irvine, CA 24.56 1.88 106.48

12. Merced, CA 24.45 5.12 115.10

13. San Diego-Carlsbad - San Marcos, CA 24.41 1.99 119.40

14. Oxnard-Thousand Oaks - Ventura, CA 23.90 1.65 105.53

15. Yuba City, CA 23.80 5.54 111.57

16. West Palm Beach-Boca Raton-Boynton Beach, FL 23.36 2.90 94.38

17. Sacramento-Arden-Arcade-Roseville, CA 23.19 2.80 111.79

18. Stockton, CA 23.16 4.32 104.98

19. Port St. Lucie-Fort Pierce, FL 22.87 3.00 97.29

20. Punta Gorda, FL 22.87 4.31 92.18

TOP 20 MSAs with HIGHEST House Price AppreciationTOP 20 MSAs with HIGHEST House Price Appreciation

Source: OFHEO Report, 4th quarter 2004

But Statistically One Can’t Prove That There is a Home Price Bubble!

Home Price Appreciation and Aggregate Income Growth by State(1991:1 - 2004:4)

NY

CA

DC

NVFL

MN

PA

VA

AZ

WA

TXTN

GA

NCOH

1

3

5

7

9

11

13

15

17

3 3.5 4 4.5 5 5.5 6 6.5 7 7.5

Annualized aggregate income grow th (%)

Ann

ualiz

ed h

ome

pric

e ap

prec

iatio

n (%

)

Median = 4.97

Median = 7.74

Red Zone

Safe Zone

Cash-Out Refinancing is Used For…Cash-Out Refinancing is Used For…

Paying down other expensive debt

Start a new business

Consumption of Durable Goods

Take a vacation in Bahamas

Send your kid to Harvard

Tiny BubblesTiny BubblesCelebrity Reality TV ShowsCelebrity Reality TV Shows

The Simple Life 4, Being Bobby Brown, Hogan Knows Best… the list goes on.

Source: Fortune, August 8th, 2005

When Courtney Love reportedly turns down a reality show, you know the market has reached saturation!

Owned Leased Total AGE

Delta’s Current Fleet

500 345 845 15+

AirTran’s Current

Fleet

10 77 87 2.5

Can AirTran Fill Delta’s Shoes?

Hartsfield-Jackson Expansion Doldrums

Airport Development Program Projected Spending - $6 Billion

Includes Seven Major Projects

Firing of Architects HAS DELAYED $1 B New Intl Terminal

Source: Inside Hartsfield-Jackson (2005 press kit)

Project Cost Project

Start Date

Opening Date

Fifth Runway $1.25 Billion In Progress May 2006

New Car Rental Facility $500 Million 2006 2008

International Terminal $1 Billion ??? ????

South Passenger Complex $1.8 Billion ??? 2010-2012

Complex Upgrades $400 Million In Progress By 2009

Other Facilities Upgrades $1.2 Billion In Progress By 2011

Local Economy Suffers a Sectoral

Growth Pause

Healthcare Blip

• Healthcare Usually a Leading Growth Sector

• 1st Half 2005 created Only 14,000 Jobs, Last Year Added 40,000 Jobs in 1st Half

JUNAPRFEBDECOCTAUGJUNAPRFEB20052004

342

340

338

336

334

(Thous.)Georgia Healthcare Jobs

1st Half 2005 was Flat Compared to 2004

Commercial Construction is Drying Up

IIIIVIIIIIIIVIIIIIIIVIIIIII2005200420032002

202

200

198

196

194

192

(Thous.)Georgia Construction Jobs

6,000 Jobs From2003q2-2004q2

but FLAT Since

Georgia 2005 Q1 Export Performance

Top Export Destination Bought GA Equipment – Singapore +$110 more than before – UK +$70M more than before– Italy +$70M more than before

Main Products:– Transport Equipment increased 50% over 2004 Q1

– $400 million more sold– Includes Turbojets and Airplane Parts (Savannah Manufacturer Gulfstream)

Source: www.Wisertrade.org

Georgia’s Report Card: B-

Indicator

Most Recent Quarter

(2005Q2)

Last 12 Months

Grade

Jobs AddedSelf & Small Business

(Household Survey)19,000 58,000 A+

Hospitality Jobs 3,400 5,700 A

Finance Jobs 30 3,000 B+

Healthcare Jobs 600 5,400 B-

Business Service Jobs -1,900 11,000 C

Total Non-Farm Jobs 7,000 20,000 C

Technology Jobs -300 -1,900 D

Manufacturing Jobs -500 -7,500 F

Blame Flat Sales Tax Revenues on Oil?

JULAPRJANOCTJULAPRJANOCTJULAPRJAN200520042003

20

15

10

5

0

-5

-10

60

55

50

45

40

35

30

25

(% Ch. Yr. Ago; Smoothed) ($)Georgia SalesTax Revenue & Oil Prices

Sales Tax Revenue (L) Oil Price (R)

As Oil $$ Go Up, Sales Tax Revenues Go Down

2005 2006 2007

Total Jobs Added (000’s) *

40.8 70.2 74.3

** High Paying Jobs are in Manufacturing, Information, Air Transport, Management of Companies, Accounting, Scientific, Computers, Finance & Insurance

High Paying Jobs (000’s) ** 2.8 4.4 10.3

% Total 7% 7% 14%

May 05 Report 6.4 8.4 12.6

Personal Income Growth 6.1% 5.5% 6.0%

Housing Permits (Atlanta) -6.5% -7.0% -2.0%

*Calendar Year Calculations (January to December)

Georgia September 2005 ForecastJobs, Income & Housing

Change from August Forecast, Down 5,000 Jobs

Please Send Your Comments and Questions to

forecast@gsu.edu