Columns:: Tighten your belt: Recession likely until midyear; state budgets affected

since 12/15/98

Columns::January 14, 2002

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Terry College’s 19th annual Georgia Economic Outlook luncheon in Altanta

In December, the Selig Center unveiled its 2002 forecast to a record-sized audience of 1,200 people at the Terry College’s 19th annual Georgia Economic Outlook luncheon in Atlanta. (Photo by Paul Efland)

Tighten your belt
Recession likely until midyear; state budgets affected

By David Dodson
ddodson@terry.uga.edu

The longest and strongest economic expansion in U.S. history roared through most of the ’90s, but drew its last breath in 2001.

Economist Nariman Behravesh delivered the national economic outlook. (Photo by Paul Efland)

The National Bureau of Economic Research has pegged last March as the official start of the recession. Symbolically, however, the recession began in earnest with the catastrophic events of Sept. 11.
With that economic reality as the backdrop, the Selig Center for Economic Growth began in late fall to compile its annual economic forecast--amid more uncertainty than any year in recent memory. In December, the Selig Center unveiled its 2002 forecast to a record-sized audience of 1,200 people at the Terry College’s 19th annual Georgia Economic Outlook luncheon in Atlanta.
“Taking last March as the start of the recession, many U.S. economists expect the recession to last no more than 12 months, followed by a relatively strong recovery that begins in the second quarter of this year,” said Dean P. George Benson of the Terry College. “We believe this viewpoint is a little too optimistic. We expect the recession to last for 15 months--through the middle of 2002.”
According to the Selig Center, economic growth in Georgia, known as gross state product, will decline by 0.9 percent this year. Deeper losses will be felt in the first six months of 2002, partially offset by gains in the second half. Georgia’s projected losses will mirror the 1.0 percent decline in gross domestic product expected for the United States in 2002.
“Today’s recession is unlike previous recessions, in which Georgia and Atlanta held out a little longer than the rest of the nation,” Benson said. “Atlanta, and therefore Georgia, depends heavily on three industry segments, which have all been hit hard.”
• Airlines: “We all know too well that Atlanta’s air transportation industry has been hammered by both terrorism and the recession. Delta Air Lines, for example, used to accumulate $8 million in cash a day. For two months after Sept. 11, they were burning $8 million a day.”
• Hospitality: “Consider Atlanta’s stock of 88,000 hotel rooms, which is one of the city’s most important assets. But this past year’s hotel occupancy rate is expected to experience its biggest drop since 1958 and finish the year at about 60 percent occupancy. Major conventions haven’t canceled, but attendance is down. Overall, Georgia’s convention and tourism business appears to be down about 30 to 35 percent from the previous year.”
• Information Technology: “One of our oft-touted strengths is now a short-term liability. Internet companies that were high-fliers are now trading for pennies, or are out of business altogether, or have been sold to firms headquartered in other states. What happened? We over-invested in information technology and information services. Excessive investment by business was the primary reason for the slowdown in growth that preceded the recession. Companies just spent too much money too casually.”
Selig Center Director Jeffrey Humphreys produced the Terry College’s annual economic forecast. He said it begins with the assumption that there will be no new major terrorist attacks on U.S. soil.
The forecast booklet is available for purchase by calling 542-4085 or on the Web at www.selig.uga.edu. The following are some of the key predictions from the Selig Center forecast.
Employment: Georgia will lose about 33,000 jobs in 2002, and the state’s unemployment rate will rise by almost two full percentage points, from 4.2 percent in 2001 to 6.1 percent in 2002. “Still, the predicted job losses are significantly smaller than the 54,000 jobs Georgia lost in the 1990-91 recession that followed Iraq’s invasion of Kuwait,” Benson said.
State Budget: State tax revenues were down 5.7 percent from July through November, compared with the previous year’s collections. Because Georgia is required by law to balance its $15 billion budget, state government spending has been cut 2.5 percent in the current fiscal year (ending June 30, 2002) and 5.0 percent in the next fiscal year.
“While the budget cuts in Georgia and roughly 35 other states may be necessary, make no mistake about it, the cumulative effect will work to prolong the recession,” Benson said.
Fortunately, the state has a budget surplus of about $815 million and a rainy-day reserve fund of about $735 million. Those funds are available to help reduce the impact of lower revenue collections. And Gov. Roy Barnes has proposed more than $900 million in new construction projects--the largest midyear budget proposal in state history--to the General Assembly. If the bond-financed construction plan passes, more than half the new building money would go to K-12, university and technical school projects.
Population: One positive note for Georgia’s economy is the continuing influx of people moving into the state’s most popular regions, particularly Atlanta, the coast and the mountains. Georgia’s 2.4 percent annual rate of growth will just about double the nation’s population growth. Benson identified three reasons why above-average population growth will continue:
• Perception of prosperity: “People will continue to move to Georgia because of the perception that economic opportunities are better here than elsewhere.”
• Chain migration: “The chain migration of family members of those who moved to Georgia during the 1990s will prove to be very resilient to recession--brothers following sisters, grandparents and parents following children.”
• Retiree migration: “Migration of retirees to Georgia will continue to be strong. In fact, more people migrate from Florida to Georgia than vice versa. They bring financial stability with them. Their incomes are less affected by the business cycle than wage and salary workers.”
Interest Rates: In 2001, the Federal Reserve cut interest rates 11 times, lowering the federal funds rate from 6.5 percent to 1.75 percent. The Selig Center anticipates that interest rates will remain unchanged in early 2002, and as soon as the economy shows signs of strengthening the Fed will reverse course and begin raising interest rates.
Homeowners will continue refinancing mortgages, which will improve household finances and help prop up consumer spending. Businesses will refinance old debts to lower their capital costs and use the savings to resume hiring and other spending.
Inflation: The consumer price index bottomed out in 1998 at 1.6 percent and had risen back to 3.1 percent in 2001, partly due to energy prices. If oil prices behave as expected, inflation will increase by just 1.8 percent this year, according to the Selig Center.
Military Towns: “While we typically think of military installations as economic engines, when troops are deployed overseas, they can’t spend money here in Georgia. And understandably, their dependents also are not in the mood to spend,” Benson said. “During the Persian Gulf War, military towns across Georgia experienced a sharp drop in consumer spending. This pattern undoubtedly will be repeated in the months ahead.”
Recent Recession History: In the last four recessions, the economy shrank by 3.0 percent (1973-75), 2.2 percent (1980), 2.9 percent (1981-82) and 1.5 percent (1990-91). The Selig Center predicts the economy will contract by about 2.0 percent in the current recession. “Thus, the 2001-02 recession will be milder than three of the last four recessions,” Benson said.
Growth Causes Change: Benson said that in the wake of Sept. 11 he was reminded of the words spoken in the 1960s by the late University of Georgia economist David McCord Wright, who was known to tell his students: “Growth comes through change and causes change.”
“The terrorists who attacked the World Trade Center were striking against that which causes change: growth, be it growth in economic globalism or social pluralism,” Benson said. “Ironically, and fortunately, they miscalculated. The terrorists would have us withdraw and move apart. But we will come together. Over the long run, our democratic values and free enterprise system will grow and flourish around the world--even in the barren lands of the Middle East.”

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