In earlier recessions, the state was able to weather the storm better than much of the rest of the country. This time, as the national economy goes, so goes Georgia.
Builders aren’t building and bulldozers are idle. New McMansions sit vacant. Businesses are declaring bankruptcy, and unemployment numbers are growing. Automakers want government bailout money because they can’t sell cars, in part because consumers can’t get loans from skittish banks, which also are begging or closing or hoarding capital.
“You have to go back to the Great Depression to see something as severe and as long lasting as what we’re going through right now,” says Albert Niemi, the former dean of UGA’s Terry College of Business who now runs the Cox School of Business at Southern Methodist University. “Without a doubt, this is the worst recession of our adult lives.”
So what happened? In a two-part series, Georgia Trend will try to peel that particular onion.
This month we feature insight from some of the state’s leading economists. Next month we’ll assess some of the damage and meet some people caught in the eye of a real estate hurricane that has blown the economy away like a house of straw.
It was the day before a hurricane and the waves were rioting off the Outer Banks of North Carolina. For Phillip Clark, a barrier islands native who grew up on a surfboard, this was an irresistible siren’s song. Then it turned into a raging alarm bell.
“When I got out there, I could see that this was some really bad stuff, a big, big closeout surf, and the whole wall of the wave was gonna slam at once,” says Clark, who has built high-end homes in Atlanta since the 1970s.
A closeout, when the entire face of the wave breaks simultaneously, is the opposite of an ideal surfer’s wave, which breaks from one side to the other, allowing the surfer to angle across the face of the wave.
“I could feel the bottom – the sand, the earth – shaking like an earthquake. So I kicked out of there, and the Coast Guard had to come get me,” Clark says. “That surf was gonna kill me. It was bigger than I was.
“This economic crisis is like that wave – it’s bigger than we are.”
It’s bigger than almost anyone anticipated, or was willing to admit, a year ago, though the surge had been building for years.
Now, an economic tsunami sweeps over Georgia, the United States, the world. Families, businesses and governments are treading water, or being pulled down into the maelstrom. The stock market plunged and the housing market plummeted. Job losses, foreclosures, bailouts, bankruptcies and bank failures pile up like so much flotsam, and U.S. automakers beg for handouts.
“As GM goes, so goes the country. Remember that one?” says Clark, who in 30 years as his own boss never had to lay off an employee, until now.
And as the country goes, so goes Georgia. In previous recessions, Georgia’s mantra was, “We’re weathering the storm better than most states.” Gov. Sonny Perdue even said as much in his opening remarks at the 26th Annual Economic Outlook luncheon, hosted by UGA’s Terry College of Business in December at the World Congress Center.
Terry College Dean Robert Sumi-chrast contradicted that sentiment, saying during his forecast that day, “This time, Georgia will not find adequate shelter from the major headwinds confronting the economy.”
Because this time, no one is Teflon-coated – not Georgia, not even the company that makes Teflon, chemical giant Dupont, which cut 2,500 jobs and trimmed 4,000 contractors in December.
Georgia, like everyone and everything else, is in the grips of the worst economic downturn since the Great Depression. All of the prognosticators agree that it’s going to get worse before it gets better, though they claim to see light signaling the end, perhaps by the beginning of 2010.
“These are unprecedented times. This is uncharted territory,” says Rajeev Dhawan, director of the Economic Forecasting Center at Georgia State University’s J. Mack Robinson College of Business.
“Everything that could go wrong has gone wrong, and at the same time,” says Jeff Humphreys, director of the Selig Center for Economic Growth at Terry College, and the researcher who provided the sobering forecast that Sumichrast delivered.
Still, there was a bit of the bullish in Perdue’s luncheon speech, which featured a number of water-logged metaphors, such as “ebbing tides” and “economic storms” and “setting sail to lead the nation” out of this mess.
But most of the 1,000 or so attendees that afternoon at the World Congress Center didn’t seem to have a stomach for sailing.
“That was fun,” quipped Steve Gooch, chairman of the Lumpkin County Board of Commissioners. “But they should probably hide the butter knives.”
There were signs, and some prescient prognosticators, accused of suffering from a Chicken Little complex, predicted years ago that an economic crisis was looming.
For example, Paul Krugman, The New York Times columnist and Princeton professor who last year won the Nobel Prize in Economic Sciences, warned in 2004 that the country’s fiscal policies were pushing us toward an abyss. But, as he wrote in a recent column, “Nobody likes a party pooper.”
So, with the blessing of regulators, lenders kept handing out mortgages like Halloween candy to anyone with a pulse; and investment bankers got richer repackaging these subprime loans into investment vehicles and securities that were bought by money managers all over the world. Many of these lenders, bankers and managers got rich at the expense of people who got poor, or poorer.
“We know that greed unchecked can destroy anything, and it’s destroyed this economy,” says Mike Fisher, a broker based in northeast Georgia, who manages the investments of about 1,000 clients.
Ironically, the runaway greed and resulting global crisis had roots in a desire to do good. You know what they say about the pavement on the road to hell. Government policies, going back decades, were developed to help create more home ownership opportunities for more people.
“These were benevolent efforts that were not properly thought out,” Fisher says. “The thinking was if more people owned their homes that two things would happen. One, we would energize the housing market and all the ancillary jobs that are associated with that. Also, we would make for a healthier, happier, contented workforce that would feel, maybe for the first time, like they were sharing the ‘American Dream.’
“What happened next could be seen even with a cloudy crystal ball.”
The U.S. housing bubble burst after inflating for 15 years. In addition to new homebuyers who were financially overextended, and hoping to refinance, the market lured large numbers of would-be speculators, house flippers who held multiple properties. Then interest rates started rising while housing prices fell, and refinancing became difficult or impossible. Defaults and foreclosures accelerated. Financial institutions around the world, which had invested in the U.S. housing market, were caught in the wave of destruction, a global economic closeout affecting every sector of the economy.
“There is a long list of ‘what-ifs,’ but if I had to sum it up, I’d say we experienced a fundamental failure of risk management in the public and private sectors,” Humphreys says. “A failure to appreciate the risk and provide a capital backstop for the risk.”
Hang Ten, Then Wipeout
Like Clark’s pre-hurricane wave, everything in the economy seemed to break at the same time. And unlike previous recessions, when Georgia’s economy did weather the storm better than most, this recession has hit home.
“Georgia’s economic situation is dire,” Robert Sumichrast told his audience at December’s Economic Outlook event.
“All the things that went wrong, we anticipated. But they all went wrong at the same time,” Humphreys says. “The three recession triggers we identified [in December 2007] all got pulled.”
Namely – oil prices skyrocketed, the housing downturn became a free fall and North Georgia’s severe drought worsened.
“On top of all that,” Sumichrast told the crowd, “our worst fear was warranted. The ‘credit shock scenario’ that I associated with housing and the subprime mortgage mess unfolded. We witnessed a true financial panic. This unusual set of events brought Georgia’s economy to its knees.”
The state lost 75,000 jobs in 2008 and another 75,000 are expected to disappear this year, when unemployment will approach or surpass 9 percent. The construction industry and everything connected with it has been hit particularly hard, especially in Atlanta, where houses and suburbs used to spread like crabgrass. But housing permits plummeted 54 percent in 2008, following a 34.6 percent decline in 2007. The number is expected to decrease again this year. Georgia’s mighty carpet industry is struggling as companies like Mohawk and Shaw slash payrolls.
In Georgia’s coastal region, an estimated 4 million square feet of newly constructed warehouse space sits unoccupied, says Michael Toma, economist and director of the Center for Regional Analysis at Armstrong Atlantic State University in Savannah.
“We have about 25 to 30 million total square feet in the coastal region, so we’re talking about a substantial percentage of that,” Toma says.
Driving the construction of all of those warehouses has been the Port of Savannah, which had been setting records for container traffic every quarter.
“Port activity held up fairly well through the first half of 2008, then we hit a brick wall,” says Toma, who produces the quarterly Economic Monitor for the Savannah metro region, which is feeling the construction pinch from afar. JCB Inc., which makes construction equipment, laid off 120 employees, about a quarter of its workforce, at its only North American plant (in Pooler).
“I attribute that to the residential construction slowdown in the U.S. and now, apparently, in South America,” Toma says. “Demand for construction equipment in the Western Hemisphere is not what the company hoped it would be.”
Meanwhile, Georgia banks are outpacing the national average in one dubious category: Through the middle of 2008, almost 35 percent of them were considered unprofitable, according to the FDIC, compared to 10 percent for the nation. Five Georgia banks had been seized by state and federal regulators in Georgia through mid-December.
Retail spending and automobile sales all have been sucked into the mire as consumers feel more vulnerable than ever. Columbus-based Bill Heard Chevrolet, the largest chain of Chevy dealerships in the world, went bankrupt – a victim of the credit freeze and the company’s own business practices, including the rampant use of subprime loans, some with interest rates as high as 28 percent.
The repo men have been busy, but even they are beginning to worry.
“For 15 years business has been great, we’ve been successful; but I feel like that’s gonna change drastically,” says Richard Grosvenor, owner of Speedy Recovery in Lithonia. “They’re not selling cars right now. Nobody has money to buy cars, and companies have cut back on lending. If fewer people are qualifying for loans, that means fewer sales, which means less business for us down the road.”
The Terry College Economic Out-look event in December sold out, and another 50 or 60 people showed up unannounced. They didn’t come for the food. Executives, CEOs, economic developers, entrepreneurs, politicians, the media – representatives from almost every industry – showed up in record numbers, about 1,000 of them, like onlookers at a train wreck. They were expecting bad news.
“I know you feel awful,” Sumichrast told them after fulfilling their expectations. “How many of you take a deep breath before opening your investment statements? How many of you no longer open them?”
But he ended the sermon on a slightly higher note.
“Well, we are about halfway through the really bad stuff. This is not the time to lose your nerve or to panic. We are not staring down a 1930s-style depression.
“That’s largely because the policy responses by the Federal Reserve, the Treasury and the FDIC have been massive, targeted and very timely. The Feds have pulled out all the stops to prevent a depression.”
Or, as Dhawan put it during his quarterly forecast in November, then-U.S. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke have “done everything they could do, gone beyond the call of duty,” to take the recurrence of another Great Depression off the table.
They were talking about the federal government’s $700 billion financial bailout, which was focused on infusing capital into banks and other institutions, to boost lending to customers and thaw the credit markets. “Everything starts with the grease that makes the economy work, the credit,” Dhawan says.
How far bailout packages – and whatever fiscal stimulus the newly minted Obama Administration can conjure – will take us down the road to recovery is educated guesswork.
But is this landscape, as Dhawan suggests, truly uncharted territory, without precedent? Or is Nobel laureate Krugman correct in his assertion that there have been very recent precedents (the housing bubble burst scant years after the dot-com bubble, for example – Hello!) and that analogies with the Great Depression are valid because of a collapse of federal policy certainties and regulatory oversight?
Either way, without the benefit of a working crystal ball, the definitive answer and the perfect route remain unclear. Explaining all of that will be the work of historians in the decades to come.
“There is no roadmap to correct all of our problems, because this is not your garden variety recession,” says Roger Tutterow, professor of economics at Mercer University and former dean of Mercer’s Stetson School of Business. “Washington recognized this and took a pragmatic approach. It will be interesting to see what kind of environment emerges out of all this.”
Humphreys believes consumers ultimately will lead the way out of the pit, but their habits will change. “Savings rates are going to rise appreciably,” he says. “The culture of spending will be replaced by a culture of saving.”
While some economists predict a calamity that could last years, economic gurus in Georgia are saying it will last 18 months, into 2010.
The recovery will be slow and wobbly. Sumichrast told his audience – just when they wanted to reach for their butter knives – to be prepared for better days ahead, that a turning point is in sight and the upturn will begin before the end of this year.
“This is not the time to lose your nerve or to panic,” he says. “This is the time to plan, and soon it will be time to act. You can take advantage of the economic recovery that is coming in 2009.”