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Code Red Risk Alert Requires More than Just Fed Rate Cuts

September 2007
Code Red Risk Alert Requires More than Just Fed Rate Cuts

Economist Dr. Rajeev Dhawan's Forecast:

"Code Red" Risk Alert Requires More than Just Fed Rate Cuts

According to Dr. Rajeev Dhawan, director of the Economic Forecasting Center at the J. Mack Robinson College of Business, tighter credit market conditions spurred by rising defaults in the U.S. subprime mortgage market has raised the country's risk alert to "code red" – resulting in an air of uncertainty for the nation's economy.

"Over the past few weeks, the situation has changed from bad to worse, spreading beyond just those involved in the subprime lending market," says Dhawan in his latest Forecast of the Nation (August 2007).

Just how long the subprime issue will last and how much impact it will have on the overall economy is dependent on the "creativity" of the Federal Reserve. "Last week the Fed made what I'd call a half step toward helping to calm the market. However, they'll

need to do much more to make a real impact," he said. "I expect to see a series of cuts totaling 75 basis points beginning in September, which will help the economy pick up steam by mid-2008."

Dhawan says that while the rate cuts will do the usual trick of getting liquidity into the market for corporate bonds, the Fed will have to do much more to help the troubled housing market which is having a negative effect on the economy. "We are caught in a riptide. What we're seeing now is equivalent to a 21st century bank run," said Dhawan. "My suggestion is for the Fed to partner with the Treasury to lift the cap on jumbo mortgages so that they can be bought by Freddie and Fannie Mae. This would keep the prime mortgage market liquid."

According to Dhawan, this is the only solution to a problem that has the potential of spiraling out of control. Fortunately, Dhawan is optimistic that the Fed's rate cuts and creative solutions will help to avoid what many fear – a recession.

Highlights from the Economic Forecasting Center's national report:

? After growing by 2.9% in 2006, real GDP growth will be 1.9% in 2007. Growth will accelerate to a 2.6% rate in 2008 as housing market stabilizes. In 2009, real GDP will grow by a 3.0% rate, which is closer to the trend growth rate.

? For 2007, consumption growth will be 2.7%. It will moderate sharply to 2.3% in 2008 and then grow by 2.8% in 2009.

? On an annual basis, housing starts will average 1.454 million units in 2007, rise to 1.533 million units in 2008, and continue to rise to 1.619 million units in 2009.

? The core CPI inflation rate will ease from its 2.5% level in 2006 to 2.2% in 2007. In 2008, it will average 1.9% before rising to 2.1% in 2009.

? On an annual basis, the 10-year bond rate will average 4.9% in 2007, rise to 5.2% in 2008, and average 5.4% in 2009, a modest increase from the preceding year.

Georgia and Atlanta – National Woes Mean Troubled Waters Ahead for Georgia

Georgia's current economic grade is a solid B+, however in his Forecast for Georgia and Atlanta, Dhawan says that the state's economy will not be immune to the fallout from the subprime market issue at the national level. "In the first half of 2007, Georgia's economy added about 40,000 jobs. However, I expect the job growth estimate for 2007 to reach only 68,000. Simple math would suggest that we would see at least 80,000 jobs for the year; however, the spillover from the slowdown in the housing market will negatively impact consumer spending and therefore put a damper on job creation."

The dispersion of jobs is another factor in Dhawan's "subdued" projections. In 2005, when Georgia's economy added 103,000 jobs, approximately 40% of these came from three sectors – retail trade, education and health, and leisure and hospitality – that make up about one-third of the economy. In the last six months the percentage of jobs created in those sectors was 65%," said Dhawan. "These three sectors are now pulling twice their weight. Going forward, I don't expect these three ‘star' sectors to substantially outperform other areas for a long period of time."

Highlights from the Economic Forecasting Center's local report:

? Georgia's employment on a calendar year basis will gain 68,300 jobs in 2007, 79,700 jobs in 2008, and 93,900 in 2009. On an annualized basis, Georgia's employment will increase by 1.5% in 2007, 1.6% in 2008 and 2.2% in 2009.

? Georgia's premium jobs ($45,000 +), on a calendar year basis, decreased by 500 jobs in 2006 but will increase by 7,900 in 2007. In 2008, Georgia will add 13,300 premium jobs and 20,400 in 2009.

? Employment in Atlanta on a calendar year basis is expected to increase by 49,900 jobs in 2007, 59,100 jobs in 2008 and 62,500 in 2009.

? Atlanta's total housing permits decreased by 5.2% in 2006. Permits will drop sharply by 21.9% in 2007, but increase by 2.7% in 2008 and increase 6.7% in 2009.

? All of Georgia's MSAs (Metropolitan Statistical Areas) will add jobs in 2007 and 2008. The star metro areas will be Savannah, Brunswick, Warner Robins, and Gainesville.

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