Georgia 2009 Economic Forecast Sluggish

About 1,000 Atlanta executives, government leaders and University of Georgia alumni recently attended the Georgia Economic Outlook luncheon in Atlanta.

The 26th annual economic forecast luncheon was hosted by UGA’s Terry College of Business. Speakers included UGA President Michael Adams, Gov. Sonny Perdue, Forbes magazine publisher Steve Forbes and Terry College Dean Robert Sumichrast.

The Georgia and U.S. economic forecasts summarized here were prepared by the Terry College’s Selig Center for Economic Growth.

The Georgia Forecast

At a Glance – The Selig Center forecast offered a grim assessment of the Georgia economy, predicting a recession that will be “severe rather than mild and prolonged rather than short,” according to Dean Robert T. Sumichrast of UGA’s Terry College of Business. “I believe that the first and second quarters of 2009 will be dreadful. Just how dreadful depends on when, and to what degree, the credit markets thaw.” Noting that recessionary periods historically average about 10 months, Sumichrast said he anticipates this recession lasting 18 months. “It will be the longest downturn since the Great Depression.” But he stopped short of calling the current economic cycle a depression.

“That’s largely because the policy responses by the Federal Reserve, the Treasury Department and the FDIC have been massive, targeted and very timely,” Sumichrast said. “The Feds have pulled out all the stops to prevent a depression. We are about halfway through the really bad stuff. This is not the time to lose your nerve or to panic. The main takeaway from my remarks is that this is the time to plan and soon it will be time to act. You can take advantage of the economic recovery that is coming in 2009.”

Where’s the Bottom of the Trough? “Given what we know today, the most likely scenario is that the economy bottoms out in the third quarter of 2009,” Sumichrast said. “Until the upswing begins, we are going to see very sharp pullbacks in spending by consumers and businesses. The aftershocks of the financial panic will continue to be felt. People and companies have lost assets. Many are truly less well off. And the wealth that has been lost will not easily be rebuilt. So, even though the economy is likely to bottom out in two more quarters, it will be very slow to recover.”

By the Numbers – For the year, Georgia’s economy is expected to grow just 1.0 percent in 2008, after adjusting for inflation. And in 2009, the state’s gross domestic product is forecast to shrink 1.4 percent. Georgia’s economy will slowly begin to turn around in the third quarter and will accelerate to about 2.5 percent growth by mid-2010. “That’s on par with the average rate of economic growth in Georgia over the past 10 years,” Sumichrast said.

Unemployment Will Double – The period of declining employment in Georgia is forecast to last for 17 months – through July 2009. But when hiring resumes in the third quarter of 2009, job growth will be too anemic to keep pace with the growth of the labor force. Consequently, Georgia’s unemployment rate will keep rising throughout 2009. “It will peak at about 9 percent in early 2010,” Sumichrast said. “That will be the highest unemployment rate since the current data series began in 1976.” Georgia’s jobless rate was 4.4 percent in 2007, rising to 6.0 percent this year.

Contrasts with 2001 Recession – “Our last recession was in 2001. Georgia’s gross state product will decline much more sharply in this recession than it did in 2001, but the job losses will be only moderately greater this time,” Sumichrast said. “We anticipate a loss of 175,000 jobs in this recession, as compared to the loss of 150,000 jobs in the 2001 recession. The main reason job losses will not be significantly worse is that many businesses entered this recession with very lean staffing. So the job losses associated with this downturn will mostly reflect substantial declines in demand, rather than overstaffing or overdue restructuring. That contrasts sharply with the excessive spending on technology and staffing that preceded the 2001 recession.”

Housing in Freefall – New housing permits in Georgia have dropped about 75 percent since their peak in the first quarter of 2006. “That is a freefall,” Sumichrast said. “Georgia’s single-family housing starts are at their lowest level since the 1981 recession when our population was about half of what it is today – almost 10 million. Relative to the size of the economy, today’s housing downturn really is much, much worse than the 1981 retraction.” The Selig Center forecasts that the steep drop in single-family home sales will bottom out by April. Two months later, new home construction should hit its low point and begin to change course.

Commercial Construction Retreating – Conditions in nonresidential construction will worsen dramatically in 2009, and an upturn in this sector will not happen before midyear of 2010. “The pipeline of projects is being completed, and the credit crunch is severely limiting the development of new projects,” Sumichrast said. “In addition, there is a lot of vacant commercial space.”

Why So Slow to Rebound? “The wealth destruction of this recession has been intense, and it has done much more damage to middle class households than is typical. That’s because the losses this time are in residential real estate, as well as in equities,” said Sumichrast. “Middle-income consumers are likely to come out of the starting gate much more slowly in the second half of 2009 than they did in previous recessions. That’s one reason why the first two quarters of the upturn will be anemic.”

Have Cash? Be Bold – Sumichrast suggested that this may be a good time to start or expand a business, if you can get access to cash or financing. “Rents are depressed. Talent is available. And established businesses are cutting back on promotions,” he said. “It will be hard for startups to get bank loans, but some of you will get loans; others of you will be able to convince your families and friends to invest in your venture.” It’s also a great time to build, if you have the capital, need the space and are ready to stop renting. “Many contractors will cut their normal profit margins to keep their crews busy,” he said. “But the best deals will be had when the recession is at its absolute worst. Think second quarter of 2009.”