The Federal Reserve will begin a series of “practically aggressive” interest rate cuts in September that will total 175 basis points by early spring 2025, according to Rajeev Dhawan, director of the Economic Forecasting Center at Georgia State University’s J. Mack Robinson College of Business. Dhawan released his outlook today (Aug. 28) during Georgia State’s semiannual economic forecasting webinar.

“The rate of inflation has moderated in the last three months, providing the Federal Reserve with the leeway to undertake practical yet aggressive rate cuts to mitigate the expected further weakness in the labor market. This is the shot in the arm the economy needs to return to its trend level by late 2025,” Dhawan said.

The forecaster posited that the Fed will announce an initial rate cut of 25 basis points at the Sept. 17-18 Federal Open Market Committee meeting, a post-election rate cut of 50 basis points in November and a cut of 50 basis points in December. The New Year will bring two more cuts totaling 50 basis points, to prevent the current soft landing from becoming a hard one.

Last year’s post-Covid desire to travel has shown signs of weakening, according to Dhawan. “The desire to see the world was very strong during summer 2023 and continued into spring 2024 with consumers also shelling out for dining, sightseeing, and related expenses. But as interest rates rose and cumulative inflation effects started to bite, people have economized on spending on non-durable goods, such as furniture, household supplies, clothing, and shoes.”

Although the household consumption rate has softened, service-side spending beyond travel has picked up. “A big-ticket item people spend money on when they have it is healthcare services. Healthcare spending is roughly $3 trillion and has grown in the past 12 months due to pent-up demand. People are finally scheduling elective medical appointments and procedures they postponed during Covid,” Dhawan said.

Looking at transportation, revenue for Delta Air Lines grew roughly eight percent last quarter, which was a moderation from previous quarters but still reasonable.

“Delta’s ticket sales grew by only five percent, and transatlantic travel grew by just one percent. So, what else grew to make eight percent? The answer is cargo and loyalty program revenue,” Dhawan said. “The 2023 boost from travel that continued into 2024 is abating; Spirit Airlines announced pilot furloughs earlier this month, and numerous airlines are talking about being more careful with expansion plans.”

Regarding employment, Dhawan noted that job growth in the last nine months on paper has been strong, but weak from a dollar-and-cents perspective, with most gains in lower-wage service sector jobs (hospitality, retail trade, social assistance, and healthcare). “It’s important to look not only at the number of new jobs, but also at their purchasing power. Less than 10 percent of job growth has been in high-paying sectors such as corporate, manufacturing, finance, wholesale, and information technology, which is a mainstay of middle-class growth.

“If you don’t add higher paying jobs, you’re not adding much to the income tax base,” Dhawan said. “For example, one IT job pay equals six hospitality worker jobs.”

Dhawan noted that the impact of job quality is apparent in Treasury receipts on income tax: In 2022, income tax receipts grew 16.5 percent, but in 2023 tax receipts declined by 15.5 percent, despite decent, positive job growth. The impact of producing a preponderance of low-wage jobs can also be seen in social security tax collections, which in contrast grew by 9.7 percent in 2023. However, as job growth has weakened in the last six months, collections have moderated to a 5.2 percent growth rate.

“The question I’m asked most often is if these aggressive rate cuts will reignite the housing market. The answer is mixed. Will a 175-basis-point rate cut translate to a 1:1 drop in mortgage rates? No, because the mortgage premium remains stubbornly high due to an anticipated wave of refinancing when the Fed cuts rates, coupled with continued large fiscal deficits muting the drop in long-bond yields to only 50 basis points in 2025.” Although the housing market will benefit from lower interest rates, Dhawan said they won’t drop to five percent any time soon.

“When it comes to home prices, the economy is bifurcated: West of the Mississippi, most housing markets are showing price compression that started in mid-2022, with double-digit drops in markets including San Francisco and Seattle,” Dhawan said. “But east of the Mississippi, it’s a different story, with the Southeast leading in home price increases as people move here due to affordability and better job prospects.”

Turning to Georgia, Dhawan described the state’s job growth as “decent” over the past seven months, with approximately 46,000 jobs added, most in low-paying sectors, consistent with national trends. “Sales tax collections grew by high double digits in 2022 and then slowed in 2023 to half that pace, but recently have stalled to barely anything. Again, it’s not just the number of jobs gained, but what they can support in terms of the purchasing power of the consumer.

Employment growth in Georgia’s manufacturing sector has fared better than national growth, Dhawan said, but has faced some headwinds, including a strong dollar and a weak global economy. “But the onshoring effect and domestic incentives have translated into announcements about new manufacturing plants located in the Peach State – not just in the booming electric vehicle sector but also in traditional manufacturing areas. That said, the rate of  announcements was stronger last year and even earlier in this year.” Dhawan attributes the drop in announcements to the strong dollar.

“What has been on a tear in Georgia is construction of data centers, with announcements coming one after the other because the state’s energy prices are very competitive compared to neighboring states,” Dhawan said. He added that data centers create construction jobs, work for steel, HVAC, and even concrete suppliers and thus a decent multiplier effect during the buildout phase, but do not result in many white-collar jobs once they are operational.

“In Atlanta, the bread and butter of area employment is well-paying corporate and IT jobs which have not seen a pickup in job creation and are now 22,000 jobs lower than levels at the start of 2023,” Dhawan said.

Although Atlanta residential real estate prices are not experiencing price compression, commercial real estate is not faring as well, due to job losses in well-paying categories.

“Big trophy buildings are not worth what they once were, with some in receivership,” Dhawan said. “Commercial buyers are opting for small, traditional office buildings, particularly in areas such as Alpharetta, Cumming, and Gwinnett County, where people want to work nearby instead of driving into town. The pre-Covid model of living more than an hour’s drive away from your place of work and commuting there daily is officially passé.”

Although Dhawan noted some other roadblocks to growth, such as cancellation of a new studio and postponed expansion at existing studios, different projects are compensating for those lost construction dollars, including work at Hartsfield-Jackson Atlanta International Airport, renovation and new construction at the state Capitol complex, and projects in Forsyth and Gwinnett counties. However, distributional effects (redevelopment of retail spaces, hotel and home building projects) that would have catered to a larger studio workforce will not happen.

Despite economic challenges, the state of Georgia’s population continues to grow. “People are still moving here,” Dhawan said. “In 2023, 58,000 people moved to the metro area. That’s lower than the 81,000 who moved here in 2022, but it’s still a growth opportunity for service providers and residential home builders.”

Highlights from Rajeev Dhawan’s National Economic Forecast

• U.S. real GDP growth on an annual average basis will be 2.5 percent in 2024, 1.2 percent in 2025, and 1.8 percent in 2026.

• National job growth will weaken sharply to only 58,000 monthly gains in the next 6 months and then rebound to 102,000 job gains by late 2025 as aggressive Fed rate cuts spur investment spending. Job growth will be a better 137,000 monthly rate in 2026.

• The 30-year mortgage rate after averaging 6.6 percent in 2024, will moderate sharply to 5.8 percent in 2025, but rise to 6.4 percent in 2026.

• Housing starts will average 1.345 million in 2024, 1.312 million in 2025, and 1.350 million in 2026.

• CPI inflation will come down from its 4.1 percent rate in 2023 to 2.9 percent in 2024, moderate further to 1.7 percent in 2025, and be 2.0 percent in 2026. After averaging 4.8 percent in 2023, core inflation will drop to 3.5 percent in 2024, and then moderate to 2.3 percent in 2025.

• Vehicle sales after averaging 15.5 million in 2023 will be lower at 15.3 million in 2024. They will then drop to 15.0 million in 2025, and then recover to 15.6 million in 2026.

Highlights from Rajeev Dhawan’s Economic Forecast for Atlanta and Georgia

• Georgia jobs: The state added 72,500 jobs (13,700 premium jobs) in calendar year 2023, but this rate will moderate down to 57,100 jobs in 2024 (11,500 premium). In 2025, the state will add a better 71,800 jobs (17,800 premium) and 90,200 jobs (24,800 premium) in 2026.

• Georgia’s nominal personal income will grow 5.2 percent in 2024, a higher 5.6 percent in 2025, and again by 6.0 percent in 2026.

• Atlanta jobs: The metro area will add 42,800 jobs (8,900 premium) in 2024. As recovery takes hold in 2025, the metro area will add a respectable 47,800 jobs (11,200 premium), and 65,700 jobs (18,900 premium) in 2026.

• Atlanta housing permitting activity decreased by 18.7 percent in 2023; single-family permits dropped by 7.8 percent, and multifamily permits decreased even more sharply by 31.2 percent. Total permit numbers will fall by 3.3 percent in 2024 as multifamily permits drop again by double digits. In 2025, total permit numbers will again drop by 7.0 percent as multifamily permits drop by 20.7 percent. Normalcy will return in 2026 when permit activity grows by 6.3 percent.