Dr. Rajeev Dhawan Director Office: ECONOMIC FORECASTING CENTER Presented at the Quarterly Forecast Conference GSU Student Center August 24 th, 2005 Forecast for the Nation, Georgia and Atlanta Source: Walt Handelsman, Long Island, NY, Newsday US Sector or AreaGrade ConstructionA++ Tax CollectionsA+ Real Dividend GrowthA+ Bank Loan ActivityA+ Corporate Revenue GrowthA Health/Finance/Insurance JobsA Weak Dollar (Earnings)B+ Overall Job GrowthB+ Euro Zone MalaiseC Oil PricesC Benefit/Health CostsD Manufacturing JobsD Auto Over-CapacityF Iraq/TerrorismF The Good, the Bad, and the Ugly Overall US Economy A-A- Antidote to the Naysayers: Economic Logic and a Dash of Common Sense! Forecast Theme U.S. Short-Term Forecast Federal Purchases State & Local Purchases Consumption Growth Bus. Investment Growth Real GDP Growth q3: 4.405q4: 3.006q1: 3.006q2: 2.606q3: 2.2 Real GDP05Q305Q406Q106Q206Q306Q4 EFC Blue Chip (Bottom 10) (Top 10) Short-Term Forecast Comparison Bus. Fixed Invest EFC Philadelphia Res. Fixed Invest EFC Philadelphia Breakdown of Retail Sales Y-O-Y Category July05 05 Q2 % Y/Y 1. Motor Veh. (26%) Furnishings (6%) Build. Mat. (10%) Food (15%) Health (6%) Gasoline (8%) Clothing (5%) Gen. Merch. (14%) Non-store (5%) Overall When the Partys Over Source: Fortune, August 22 nd, 2005 (Percent change, 2000 dollars) Business Investment Source: GSU, Economic Forecasting Center, August 2005 High Gasoline Prices Also Cause Investment in Energy Efficient Equipment Dow 30 Revenue Growth ? AIG, Merck, Walmart & Exxon Mobil Data Revisions and the Employment Report MarAprMayJuneJulyAug High Pay Jobs Low Pay Jobs Feb March April May June July Latest Month of Data Month Report Published Is The Bond Market STILL Not Cooperating? 10 Hikes Totaling 250 Basis Points in 13 Months 10-Year is DOWN by 40 Basis Points! Breakdown of Consumer Prices 3-Month Rate CategoryWeightJuly05July04Dec03 1. Core79%1.7%2.3%1.0% 2. Non Durables 29%4.1%8.2%2.4% 3. Durables11%-0.6%-1.3%-6.3% 4. Services60%2.8%3.4%2.6% 5. Housing40%2.5%3.6%1.7% 6. Commodities40%2.6%5.5%-1.3% 7. Food15%2.7%4.7%4.8% 8. Gasoline3%14.0%43.1%-12% 9. New Cars 5%-1.7%-0.4%-1.9% 10.Medical6%3.8%4.1%4.2% Overall2.7%4.2%0.9% My slightly bold forecast is for two 25-basis point hikes by the FED at its next two meetings, then signaling the end of this tightening cycle with a dramatic 50-basis point hike at the December meeting Bold FED Forecast! 10-Year Bond Rate and Trade Deficit CPI Inflation Year Bond Rate Core Source: May 2005, Forecast of the Nation 10-Year Bond Regression Testimony of Chairman Alan Greenspan Fannie's and Freddie's purchases of their own or each other's mortgage-backed securities with their market-subsidized debt do not contribute usefully to mortgage-market liquidity, to the enhancement of capital markets in the United States, or to the lowering of mortgages rates for homeowners Before the Committee on Banking, Housing, and Urban Affairs, April 6th 2005 Housing Starts Auto Sales Exports Imports Trade Deficit % of GDP Budget Deficit % of GDP U.S. Short-Term Forecast Prediction Vs. Reality A+++ Source: Michael Ramirez, California, The Los Angeles Times How China Runs the World Economy EXPORTS: (22.8%) IMPORTS: 42.5 (7.7%) EXPORTS: $25.7 (4.4%) IMPORTS: $57.4 (10.4%) EXPORTS: $23.3 (4.0%) IMPORTS: $29.8 (5.4%) EXPORTS: $72.3 (12.4%) IMPORTS: $88.9 (16.1%) EXPORTS: $94.5 (16.2%) IMPORTS: $40.9 (7.4%) EXPORTS: $45.6 (17%) IMPORTS: $14.6 (5.3%) EXPORTS: $78.6 (8.8%) IMPORTS: $46.6 (6.5%) EXPORTS: $122.3 (22.7%) IMPORTS: $56.3 (14%) EXPORTS: $44.6 (17.8%) IMPORTS: $27.2 (12.7%) Source: CIA Fact book Hong KongJapan S. Korea Germany (%) UNITED STATESGERMANYJAPAN The Worlds Growth Imbalance Source: Global Insight, EFC Production (P)Consumption (C) NET Change in Supply PP CC P C) US Canada Mexico JapanNA UK China India Russia Middle East Africa VIN* Source: BP Statistical Review of World Energy, June 2005 Can We Blame China for High Oil Prices? * VIN Venezuela, Indonesia, Norway Top US Trading Partners (F) Current Account (% of GDP) Inflation Exchange Rate (per US$) Short- Term Rate 2004 Latest 1. Canada Japan Mexico UK Netherlands Germany China France Ireland Belgium Euro Area GDP Growth International Country Analysis Source: IMF & Blue Chip International ($/Bbl) Anonymous Vent The end is near when a share of Delta stock costs less than a Happy Meal. Source: The Atlanta Journal-Constitution, August 11 th, 2005 Delta / Air Transportation 1.Fuel Prices Still Very High Underestimated Current Fuel Costs Fuel in Q2 was $1.60/gallon, 50% higher than a year ago 2.Crunch Time Posted $1.5 Billion in Losses 1 st half 2005 Delta needs CASH fast Sold regional subsidiary ASA to SkyWest for $425 million Renegotiated Finance Staves off Bankruptcy? New Mastercard/VISA deal costs $750 million 3.Competition Getting Breaks United Dumped $6.6 Billion in Pension Costs US Air and America West Merger OwnedLeasedTotalAGE Deltas Current Fleet AirTrans Current Fleet Can AirTran Fill Deltas 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) ProjectCostProject Start Date Opening Date Fifth Runway$1.25 Billion In Progress May 2006 New Car Rental Facility$500 Million International Terminal$1 Billion ??????? South Passenger Complex$1.8 Billion??? 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 Between June 2003 and Aug 2004, Georgia Gained 70,000 jobs HOWEVER, Georgia Gained Only 38,000 Jobs in the Last 11 Months Healthcare Blip Healthcare Usually a Leading Growth Sector 1 st Half 2005 created Only 14,000 Jobs, Last Year Added 40,000 Jobs in 1 st Half 1 st Half 2005 was Flat Compared to 2004 Information and Technology Mergers: -Qwest and MCI -Sprint and Nextel -AT&T and Cingular Layoffs: MCI -600 Earthlink -180 AT&T -350 Cingular: -10% AT&T/SBC -13,000 FLAT 1 st half % growth over the 1 st half of 2004 Source: US Census Bureau Construction Activity2005Q2Last 12 Mos.Grade Jobs Added B Permit Growth0.3%3.2% B- Commercial Construction is Drying Up 6,000 Jobs From 2003q2-2004q2 but FLAT Since Georgias Report Card: B- Indicator Most Recent Quarter (2005Q2) Last 12 Months Grade Jobs Added Self & Small Business (Household Survey) 19,00058,000 A+ Hospitality Jobs 3,4005,700A Finance Jobs 303,000 B+ Healthcare Jobs 6005,400 B- Business Service Jobs-1,90011,000C Total Non-Farm Jobs7,00020,000C Technology Jobs ,900D Manufacturing Jobs ,500F Georgias Recent and Potential Job Layoffs RECENT - Winn Dixie 3,000 workers in 50 unsold stores - Earthlink 180 workers Future Layoff (Uncertain When & Where They Will Occur) - HP - 14,500 jobs (Atlanta currently has 1,600 workers) - Kodak - 10,000 jobs - Kimberly-Clark - 6,000 jobs over 3 years - Coca-Cola Enterprises - 6,000 jobs Georgia Tax Collections Source: Georgia Department of Revenue Looks Great, Right? But We Have Concerns Why Is Sales Tax Flat?? Blame Flat Sales Tax Revenues on Oil? As Oil $$ Go Up, Sales Tax Revenues Go Down Georgia ended 2004 up by 20.6% and started 2005 up by 20.2% Georgia Export Growth is Still Stronger than the US Source: World Institute for Strategic Economic Research (Wisertrade.org) 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: CAFTA Details 1.The Dominican Republic and the countries of Central America are Georgias 9 th largest export market 2.Georgia exported $640 million in Georgia exported $290 million in Non-Apparel Textiles 4.After the first year, Georgia companies expect to increase their sales to this region by $262 million and add 1,500 jobs Source: US Chamber of Commerce, Economic Impact of DR-CAFT on Georgia, 2004 ed. Tourism 1.Hotel Occupancy and Employment Up Hotel Occupancy Up by 5% in May 2005 Added 7,000 jobs in calendar year Georgia Aquarium $200 million+ Opening November GWCC Reservations Coming Back 55% in 2005 (booked) 45% in 2006 (booked) 4.But Ultra-Large Conventions Look Elsewhere Las Vegas, Orlando, Chicago have more space and more hotel rooms Sources: GWCC and PKF Consulting Total Jobs Added (000s) * ** High Paying Jobs are in Manufacturing, Information, Air Transport, Management of Companies, Accounting, Scientific, Computers, Finance & Insurance High Paying Jobs (000s) ** % Total7% 14% May 05 Report Personal Income Growth 6.3%5.9%6.0% Housing Permits (Atlanta)-6.5%-4.8%-2.6% *Calendar Year Calculations (January to December) Georgia August 2005 Forecast Jobs, Income & Housing Change from May Forecast, Down 30,000 Jobs Jobs Added (000s) Total Jobs* Atlanta Forecast ** High Paying Jobs are in Manufacturing, Information, Air Transport, Management of Companies, Accounting, Scientific, Computers, Finance & Insurance High Paying ** % Total7%13%20% Low Paying % Total41%42% *Calendar Year Calculations (January to December) Housing Starts Will Slip Everywhere FY 05FY 06 Forecast Income (50% of total) 9.8%* Grows in the 6.0% Range; Closer to Personal Income Growth Sales (36% of total) 7.2% Moderates to the 5.0% Range as Home Building Returns to Normalcy Motor (5% of total) 0.0% $60+/bbl Cuts into Discretionary Consumer Spending Corporate (4% of total) 44.0% No More Positive Surprises? TOTAL TAX8.0%6.0%+ Revenue Tax Collection Projection (Percent Change, Based on Monthly Collection Reports) *Excludes the $202 Mil. from HB-43 in May04 Metro Area Savannah Albany Brunswick Columbus Macon Dalton MSA Forecast Best and Worst Employment Growth Rates How Vulnerable is the US Economy to Oil, Housing, Politics and Consumers? EXPERIMENT #1: OIL HITS $75 Gary Shilling A. Gary Shilling & Co. EIGHT FACTORS THAT CAUSE DEFLATION July 11 th, 2005 Source: Barrons, June 20 th, End of Cold War Released Resources 2. Central Banks are Too Aggressive in Fighting the Inflation War 3. Corporate Cost-Cutting and Restructuring 4. Productivity from Technology 5. Rise of Wal-Marts 6. Deregulation and Privatization Wave 7. Globalization has an Ugly Side: Excess Surplus 8. The U.S. consumer Becomes a Saver! EXPERIMENT #2: CONSUMER MALAISE Marty Cohen Cohen & Steers THE CASE FOR REAL ESTATE? August, 2005 Source: Barrons, August 15 th, 2005 Q: Real-Estate Investment Trusts are like the Energizer Bunny. Can They Keep Going and Going and Going? The replacement costs of real estate have risen dramatically - raw materials, lumber, copper, steel, cost of labor, or the cost of land, particularly in major cities. That keeps supply in check, because it costs too much to build a building today. Q: Is this the new reality? If the economy continues to grow and there is more job creation to continue for the foreseeable future with respect to office buildings, multifamily buildings and hotels. Many hotels are being converted to condominiums now in major cities, construction is pretty much prohibitive, ..and creates a great pricing umbrella for the owners of property. Looking forward, property taxes will be a major negative for real estate. Source: Fortune, August 8 th, 2005 What if There IS a Real Estate Bubble? The run-up in home prices has proved good therapy for people who lost their shirts on tech stocks. In their own eyes, theyve redeemed their pride as investors. But instead of learning the lesson that the fundamentals always win, theyre buying into a new era of ridiculous arguments. EXPERIMENT #3: HOUSING STARTS DROP BY 20% ExperimentImpact on 2006 Growth GDPInvestment Non-farm Employment 1. Oil Rises to $75 by 2006q1-0.4%-0.1%-500K 2. Consumer Malaise-0.5%-1.1%-600K 3. Housing Starts Abruptly-1.0%-1.7%-700K Drop by 20% Sensitivity Analysis 4. #1 plus #2 plus #3-1.3%-1.9%-1.2 Mil. Tiny Bubbles Celebrity Reality TV Shows The Simple Life 4, Being Bobby Brown, Hogan Knows Best the list goes on. Source: Fortune, August 8 th, 2005 When Courtney Love reportedly turns down a reality show, you know the market has reached saturation! Please Send Your Comments and Questions to