Off the Cuff: Rajeev Dhawan, director of Georgia State University’s Economic Forecasting Center

Oliver Bok , Editor in Chief

Rajeev Dhawan is a professor and the director of the Economic Forecasting Center at the Robinson College of Business at Georgia State University. Dhawan frequently publishes economic forecasts for the metro-Atlanta economy, the regional Southeast economy and the broader U.S. economy. Dhawan has made appearances on CNN, MSNBC and The Bloomberg Report, as well as other TV programs. He is also the author of Firm Size, Financial Intermediation and Business Cycles. He gave a talk on Monday as part of the Economics department’s Danforth-Lewis Speakers Series.

What’s your economic forecast for the upcoming year in the U.S.?

Basically, my forecast for the year’s economy is continuation of the same old. We’ve been doing about 2.5 percent growth on average for the last couple of years. It’s not going to increase for two reasons. Number one, we have a global slowdown going outside of the U.S. Europe is in a bad shape, in a recession practically. And then the other one on which the world’s economy runs a lot is China and its suppliers. China slowed down in 2012 — they were trying to cure their home price inflation problem — and when they tried to restart it, they were unsuccessful. So you hear reports about China not doing as well, which has implications for the rest of the world. And now with the oil prices down to half the level they were before, all the Middle Eastern oil producing countries have less money to spend. So you’re not going to get any kick from there. Do not depend on any help from our trading partners for another year or so. We have to rely on our own domestic consumption and investment. That’s doing okay. Housing is picking up. Investment is fine — it’s going to suffer a bit because of the low oil prices; all the oil companies over here are cutting back on fracking and everything. So we can maintain the growth, but we just can’t accelerate.

How do you generally go about the process of making economic forecasts?

I read a lot. I read four newspapers a day — print versions, not online. I read online stuff. I talk to executives in the community. I go around making speeches, I talk to people. I talk to you, I talk to a small businessman. That gives me some idea. But ultimately you have to use your basic economic principles to figure it out. What are the components of GDP: consumption, investment, government spending, exports, imports. What’s happening to each component? You have some ideas, then you sit down with an econometric model on a computer and put your assumptions in there, and then you see what comes out. It’s like the secret sauce, you have to be thinking about it. Models can only help so much. They are just a guiding post. They’re like a grand accounting device to keep track of everything, but you have to be the one pulling the levers. So you pull a lever, things will move and the econometric lever will keep track of that. But if you pull the wrong lever, you’re going to get the wrong answer. So the idea is to think over which levers are moving up and down.

Do you think 2.5 percent growth is the new normal? Are the decades of 3, 4 percent growth over?

That’s a good question. What’s the potential growth rate? In the old ones, you would say 3 or 3.5 [percent]. And there was a good reason: we were building houses at a rate of two million homes per year. What are we doing right now? Less than a million. How can we be at 3.5 when we aren’t building that much housing? My expectation is that we’re going to go up to 1.1, 1.2 [million houses] in the next couple of years, so that’s why 2.5 percent seems reasonable.

So you view housing as the sector that drives the rest of the economy?

Housing is a big driver. Why do people buy homes? They have a job, they’re making some money. That means jobs are being created. Number two, when some body buys a home somebody has to build it. So people get jobs, companies get orders for lumber, materials, steel, other stuff. So that’s why the economic activity depends on what housing is doing—new housing, not just the resale of existing homes. New home building.

But the population isn’t really growing, right?

The population is growing, unlike the rest of the world. It grows about 2 percent, that’s pretty decent. But for example, the young people these days, the Millennials who are working and have some cash saved up, they prefer to rent rather than buy, and that keeps demand down.

Consumer debt is still high. Does that worry you?

I think that consumer debt becomes a problem only if your other avenues of income and assets are suffering. For example, right now the income growth is decent, nothing great, but people have made good money on their stock market portfolio. Debt is a function of what your assets are too. Servicing the debt is really cheap right now, so I don’t think there is really an issue with the debt. The issue is you may have trouble getting the loan from the bank to buy a mortgage at terms that you were getting 10 years ago. You can’t get those terms now. Credit is tight, it’s not that debt is too high.

When do you think the Federal Reserve will raise interest rates?

I think the Fed will very reluctantly, if it has to, start raising the rates sometime later this year. My forecast from the start of this year said not before September and even then gingerly. And they can even delay that. Should they? If they economy is not even maintaining 2.5 [percent GDP], then don’t do it. If the economy starts doing 3 percent, go aggressive. If the economy is doing only 2 [percent], there’s no need to move it.

Do you think quantitative easing was a success?

Yes. If you’re a homeowner, and you’re still not underwater, a lot of people have refiled two or three times in the last five years. That’s the effect of QE in keeping interest rates low. The trouble right now is that the corporate sector, which has to invest and expand and do things to hire people, they are reluctant. I don’t blame them. They just came off a massive downturn, so they’re a bit shell-shocked. They are gingerly opening their wallets for spending, and remember, our companies have become very multinational, whether you’re Apple, IBM, GM or even GE, a large proportion of your revenues are now coming from sales abroad. This wasn’t that true 15 years ago. So if the rest of the world isn’t doing too well, the companies headquartered over here, even if they build a plant abroad, they need the people over here and they’re not going to expand. For example, Coke has talked about cutting back $3 million in spending. That’s a code word for not hiring.