GSU: 2019 Started Strong Due to One-Time Factors, Cannot Mask Overall Moderation

Staff Report From Georgia CEO

Thursday, May 23rd, 2019

The U.S. economy is transitioning to a new growth path and production-level shocks in the system can derail its momentum, according to Rajeev Dhawan of the Economic Forecasting Center at Georgia State University’s Robinson College of Business.

One shock, the indefinite grounding of all Boeing 737 MAX planes, is domestic in nature and bad news for parts suppliers, especially in the face of already weakened corporate capital expenditures over the past six months. The other shock, stress on the world oil supply from geopolitical issues (warlord activity in Libya, unrest in Venezuela, U.S. sanctions on Iranian oil exports), is global.

“Shocks become a problem when the economy transitions to a new equilibrium, as it is now,” Dhawan wrote in his “Forecast of the Nation” released today (May 22).

2018’s strong growth rate was set in motion with the Tax Cuts and Jobs Acts of 2017, which, Dhawan said, “provided a type of fiscal stimulus, a positive change in the investment climate and job growth one-third higher in the first half of 2018 than the normal monthly job creation pace of 2017.”

The boost to investment spending petered out in the second half of 2018 because of numerous factors, chiefly stock market volatility from trade skirmishes and softening global growth. But other factors changed as well. The Federal Reserve undertook four rate hikes in 2018 but has paused further action since December. The length of the pause, and whether the Fed’s next action is a hike or a cut, will depend on how uneventfully the economy transitions to its new growth path. So far, the transition has been more eventful than not.

Retail sales were hit hard by a steep decline in the stock market. After growing 6.1 percent in the second quarter of 2018, retail sales moderated to just 1.0 percent by the fourth quarter.

As a result, “the positive income effect from rising job growth got wiped out by negative wealth effects emanating from stock market carnage,” the forecaster said.

Dhawan expects the Fed to begin rate cuts in December 2019, with a total of three by mid-2020.

As for tariffs on China, Dhawan said “The immediate impact is minor. Future impacts, especially reduced corporate desire for investment, will not be apparent for some time.”

Highlights from the Economic Forecasting Center’s National Report

GDP growth of 2.9 percent in 2018 will moderate to 2.6 percent in 2019, moderating further to 1.9 percent growth in 2020 and 2021.

Investment growth will moderate from 6.9 percent in 2018 to 3.7 percent in 2019, then to 3.4 percent in 2020 and rise to 3.6 in 2021. Monthly job gains will moderate to 179,100 in 2019, drop to 121,000 in 2020 and gain a similar 129,900 jobs in 2021.

Housing starts will average 1.221 million in 2019, 1.239 million in 2020 and 1.262 million in 2021. Vehicle sales will be 16.5 million in 2019, 16.0 million in 2020 and 15.9 million in 2021.

Even in the face of expected Fed rate cuts, the 10-year bond rate will average 2.7 percent in 2019, rise to 2.9 percent in 2020 and rise further to average 3.3 percent in 2021.

2019 Started Strong Due to One-Time Factors, Cannot Mask Overall Moderation

Strong employment gains during the first quarter of 2019 – particularly in hospitality, retail trade and temp employment – were most likely due to one-off factors, such as hosting Super Bowl LIII on top of other championship games, according to Rajeev Dhawan of the Economic Forecasting Center at Georgia State University’s Robinson College of Business.

“Georgia’s first quarter headline job gains were stellar, but there were one-time factors at play,” Dhawan wrote in his “Forecast of Georgia and Atlanta” released today (May 22). “Since there is not another equivalent big event on the horizon, the momentum created is already moderating as evident in April’s job loss numbers, which were concentrated in these hospitality and retail sectors.”

Annual employment benchmarking performed by the Bureau of Labor Statistics in March revealed Georgia’s job additions were downgraded from 103,500 in previously reported data to 89,000 in the benchmarked numbers. Analysis also revealed that globally connected sectors (such as corporate, manufacturing and information) showed continued moderation in job growth.

“Job growth moderation in globally connected catalyst sectors will trickle down into domestically demand driven sectors, (retail trade, hospitality) and result in a continuation of moderation of overall employment growth,” Dhawan said.

Metro Atlanta is expected to experience moderation similar to the state overall, according to the forecaster, especially because Atlanta contains most of the state’s Fortune 1000 companies.

“One continuing concern is where to find all the tech jobs we read about in the media,” Dhawan said.

His hypothesis is that some technology jobs are being counted in other sectors.

“Georgia is home to many technology companies in healthcare, particularly in the Atlanta area (GE Healthcare, Intermedix and McKesson Technology Solutions) and finance companies (Global Payments, NCR and TSYS),” Dhawan said. “Tech jobs may be counted in those sectors instead.”

Looking beyond Atlanta, recent job manufacturing announcements have brought positive news. The state announced groundbreaking on the Georgia International Trade Center in Effington County, and Plastics Express, a resins manufacturer, announced two new facilities in Savannah.

Highlights from the Economic Forecasting Center’s Report for Georgia and Atlanta

Georgia employment will add 76,600 jobs (14,700 premium jobs) in 2019, 61,700 jobs (11,200 premium) in 2020 and 53,500 (9,700) in 2021.

Nominal personal income will grow 4.4 percent in 2019, another 4.9 percent in 2020 and 5.0 percent in 2021.

Atlanta will add 54,400 jobs (8,900 premium jobs) in 2019, 40,600 jobs (8,000 premium) in 2020 and 36,300 jobs (7,400 premium) in 2021.

Atlanta housing permitting activity will fall 21.2 percent in 2019, decline 8.8 percent in 2020 and fall another 3.5 percent in 2021.