ATLANTA — A combination of lackluster consumer confidence and “jittery businesses” has led to a thrifty consumer and a cautious environment for business investment, says Georgia State University economist Rajeev Dhawan.
In light of these trends, plus weakness in the global economy, Dhawan expects U.S. employment growth to moderate over the course of the year from the recent level of 200,000-plus jobs per month to closer to 150,000.
Dhawan delivered his tepid economic outlook on Monday to lodging industry professionals gathered at the Marriott Marquis in downtown Atlanta for the 24th annual Hunter Hotel Investment Conference. His insights left attendees to ponder whether the glass is half empty or half full. After all, the 44,000 new jobs added in the leisure and hospitality sector in February signals that business is growing in the lodging industry at a fairly healthy clip.
Corporate revenue growth directly affects business investment, Dhawan emphasized. The growth rate in revenue among the “Dow 30” companies (companies in the Dow Jones Industrial Average) climbed throughout much of 2011 on a year-over-year basis, but moderated in the fourth quarter. In turn, the growth rate of investment in equipment and software also began to slow.
“If you are a CEO and the cash register is flowing very well, you feel more confident and you feel more likely to do some investment and expansion,” he said. “But if revenue slows down, that usually is a bad sign.”
Source: GSU Economic Forecasting Center
One particularly bright spot is the huge uptick in U.S. car sales, a trend Dhawan didn’t foresee to such a high degree. “In the last 6 months, the biggest error I had in my forecast was predicting vehicle sales. They are awesome. And as they are awesome, so is the industrial production.”
According to Autodata Corp., the seasonally adjusted annual sales rate for U.S. light vehicles was 15.1 million in February, the highest rate since February 2008. How long can vehicle sales remain at this level? That is the $64,000 question for economists.
“Two things to consider: one is the seasonality. It was a warm winter,” said Dhawan. “Instead of being snowbound at home February, you were out shopping for cars and other stuff. What you were going to do in April, May and June, you already did in January and February.
“The second thing is deals,” Dhawan continued. “They [car manufacturers] gave away the cars. All of a sudden the old madness that happened between 2002 and 2007 — drop the price, give the discount — has come back again, and you are a very savvy consumer.”
Logically, this trend can’t continue, Dhawn said. “But I cannot forecast the madness of the car manufacturers. If they end up in a bidding war, and they want to clean out their inventory, they will do it.” Because the underlying performance of the economy doesn’t justify the robust car sales, Dhawan believes that the economy will get an artificial boost, gas prices not withstanding.
Source: GSU Economic Forecasting Center
Why Europe matters
The European sovereign debt crisis matters to the U.S. That's because several American companies included in the S&P 500 generate a substantial portion of their total revenue from Europe, Dhawan explained. Kraft Foods is a good example. Based on data provided by S&P and Capital IQ, USA Today reported last fall that Kraft had generated $15.7 billion in revenue from Europe during the latest fiscal year, representing 32 percent of the company’s total revenue. General Electric Co. recorded $31.8 billion in revenue in Europe during the same period, representing 21 percent of its total revenues.
The euro zone now finds itself in the midst of a mild recession. Gross domestic product in the euro zone contracted 0.3 percent in the fourth quarter of 2011. “So, if there is a hiccup over there, it is going to affect our companies over here,” said Dhawan.
But the economic slowdown isn’t limited to euro zone, he emphasized. “If you look at world GDP growth, you notice one thing: lots of negatives and lots of slowdowns. If you take the U.S. out of the equation, about 60 percent of the world is either in recession or rapidly slowing down.”
Japan’s economy, for example, contracted at an annualized rate of 0.7 percent in the fourth quarter of 2011. That figure was revised from an earlier estimate of a 2.3 percent contraction, an indication that the soft patch in the world’s third-largest economy isn’t as severe as first believed. Still, the slowdown is a concern.
What’s the message for the hotel industry? “If you are dependent on foreign travel and foreign tourists, you need to be a little bit careful,” said Dhawan.
Oil: The Black Swan
The American consumer hasn’t felt the full impact of rising gas prices just yet, according to Dhawan, so it would be premature for businesses to conclude that Americans have grown accustom to paying $4 for a gallon of gas.
“It was a very mild winter, there was excess cash flow in people’s pocket,” explained Dhawan, adding that the payroll tax holiday is still in effect. Come summertime, consumers may feel a lot more burdened by high gas prices as the extra cash in their pockets stemming from low home heating bills begins to dry up, he said.
“There is an oil shock in the system, and it’s keeping a lid on a lot of good things that can happen, and it’s not going away,” said Dhawan. With war clouds gathering in the Middle East, the future price of oil is a big unknown. “It’s the black swan.”
— Matt Valley