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By Michael E Kanell
Atlanta Journal-Constitution
Thursday, August 23, 2007
A leading Georgia economist calls the nation's credit crisis "a code red" that has shaken the financial markets and sparked debate about whether the Federal Reserve must act aggressively to steer the economy away from recession.
But so long as the Fed does cut the benchmark interest rate to fuel borrowing and spending, a downturn is unlikely, said Rajeev Dhawan, director of the Georgia State University Economic Forecasting Center. Others disagree, arguing that the economy is simply not that weak and Fed action could be pointless or even backfire.
During the center's quarterly conference Wednesday, Dhawan blamed the painful slowing of the housing market for the larger economic worries —- mainly a credit squeeze that could chill consumer spending and business investment.
"We are caught in a riptide," he said. "This is like a 21st-century run on the banks."
The economy last year grew 2.9 percent, unspectacular but only slightly below what is seen as its cruising speed. It's the trend that was troubling: Expansion slowed toward the end of the year and the first quarter of 2007 was just barely positive.
Despite the gloom-tinged warnings, Dhawan projects a return to stability in housing and gradual improvement with Fed intervention: Georgia payrolls will expand by 68,300 jobs this year and 79,700 jobs next year.
Atlanta's economy will account for most of that, he said: 49,900 jobs this year and 59,100 jobs next year. However, unlike the boom years of the last decade, when the economy churned out "premium" jobs, the lion's share of new positions will pay less than $45,000 a year, he said.
The state's unemployment rate increased to 4.9 percent in July, up from 4.7 percent in June. Metro Atlanta's unemployment rate was 4.7 percent in July.
The classic Fed antidote to a slowing economy and a credit crunch is to lower short-term interest rates in a bid to spur economic activity. Yet for more than a year, the Fed's rate-setters have held rates steady, insisting that inflation was a greater problem than a slowdown.
Last week, they abruptly shifted gears and lowered a key rate.
Nice try, but not enough, Dhawan said. "They'll need to do much more to make a real impact. 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."
That would take the basic rate from 5.25 percent to 4.50 percent.
Still, if the Fed's course depends on reading the economy, not everyone agrees that slowing growth will mean a stall-out.
"It is true that the risks of recession have gone up," said Adrian Cronje, director of asset allocation at Wilmington Trust. "But our view is that we will avoid that outcome."
Fed officials fear that trimming rates would encourage investors to take unreasonable risks, he said. "They do not want to signal that they are going to ride to the rescue every time."
While the markets now expect dramatic Fed action, it may not be necessary —- and corporate profits are key, Cronje said.
While recession may not be in the cards, Cronje does expect to revise his forecast downward.
It was bulls that dominated on Wall Street Wednesday, as the Dow Jones Industrial Average climbed 145 points.
Even if that bounce is temporary —- which is likely —- it is not the Fed's job to prevent "another leg down," said Emily Sanders, president and CEO of Norcross-based Sanders Financial Management. "If the Fed cuts before its Sept. 18 meeting, I think it will send the wrong message. It will send the signal that the Fed is a political pawn of Wall Street."
She said that credit worries have needlessly inflamed fears of a broader malaise.
"I still believe that the U.S. has a healthy economy, maybe not quite as healthy as a month ago," she said. "I am in the camp of those that think the Fed does not have to do something."
Fed officials have said their actions will be shaped by forthcoming data. Recent reports are discouraging: Foreclosures are climbing —- especially in the subprime market where borrowers have tainted credit or limited incomes. Those problems further damage the already shaky housing market.The forces behind the change are too big for bankers to control, argued Steven Hochberg, chief market analyst at Gainesville-based Elliott Wave International. "I'm continually amazed at the 'faith' economists place in the U.S. Fed and in central banks in general. Everyone involved with markets incessantly talks about what the Fed should or shouldn't do, as if it matters."
Consumers are shifting away from consuming and borrowing —- the factors that have long driven growth, he said. "Once psychology turns, it's impossible to get the genie back in the bottle."
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