In an uncharacteristically efficient number of days, 10, the Legislature completed most of the agenda in the Governor’s Call which included reapportioning the House, Senate and Congressional districts and validating the freezing of the gas tax. The action on reapportionment moves now to the U.S. Dept. of Justice and likely the courts. Attention can now return to reality and the growing fears about the economy, Georgia’s 2012 amended budget and the FY2013 state budget.
In that vein, this week’s column will start the process this fall of gauging where the state is economically and how expectations will drive the direction of state budgets.
Forecast of the economy—part I
Recently Dr. Rajeev Dhawan of the Georgia State University Economic Forecasting Center gave a presentation entitled "Is The Recovery Running on Empty" which detailed forecast of the economy. Walking away from the presentation, the general mood seemed to be confusion. The cause of this confusion was not the quality of the presentation but rather the message that economic indicators are sending.
This week, we will explore some of the concepts presented and discuss the implications for our state.
An interesting point discussed by Dr. Dhawan was the problem of perception. There is so much uncertainty about the economy, taxation and government spending that at least some of the current problem is due to a crisis of confidence. This is understandable to the average person.
For example, not knowing if you will have a reliable income three months from now would probably make you refrain from buying a new car to replace the unreliable one you currently have. Or maybe you defer putting braces on your children’s teeth. These decisions have ripple effects on the economy as groups of people make similar choices.
In three months, the fears you had about losing your job might be unfounded, but the auto dealership and orthodontist felt a fiscal impact from the aggregate effect of consumers not buying as usual. These fears are also the same ones being felt by CEOS and owners of businesses, only with much broader implications.
Much criticism has been voiced about the amounts of cash reserves that private businesses might be sitting on and why they can’t spend these funds on expansions or jobs. But in a sense, CEOs are just mimicking the decisions made by ordinary people. Just like the decision to buy a much needed car is delayed, so is the decision to expand into a new market, hire additional staff or release a new product. It might be a wise business decision, but the pressure to wait will be high.
Economic indicators also reflect this cautious mood. Consumer confidence and consumer sentiment indicators are declining. Chief executive confidence and durable goods orders were showing recovery over the past year, but now they are also declining. The index of small business optimism also reflects this trend.
The debt ceiling crisis only added to the confusion by threatening tax changes and spending cuts without specifics or an immediate timeline. Real solutions are unlikely to arise until after the presidential election, but without a solid consensus on what spending cuts or tax changes are going to be made, staying still will be the intelligent choice for many.
All of this led a central banker to state, "There’s certainly uncertainty about regulation … but there’s also uncertainty about whether this is a durable recovery. People don’t know whether to invest or hire because they don’t know … whether the recovery is going to continue."
What we need to realize is that recessions are not just about dollars and cents but also about psychology. It might be appropriate to change the riddle from "What came first, the chicken or the egg" to "What came first, the recession or the fear of a recession?"
Next week: Part II — Elements of Georgia’s economy and August state revenues
I may be reached at
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E-mail at Jack.Hill@senate.ga.gov
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