ATLANTA—The festive nature of St. Patrick’s Day provided a perfect backdrop for economist Rajeev Dhawan on Wednesday during the opening session of the 22nd annual Hunter Hotel Investment Conference.

“A simple fact of life is that all hangovers are lousy,” Dhawan said as he explained the current global financial situation to the hotel-industry executives in attendance.

Rajeev Dhawan

‘The Day After Tomorrow’

Dhawan called his presentation: “The Day After Tomorrow,” which he said indicates the worst is over. He showed a number of charts, including:

• The weekly U.S. raw steel production capacity reached an all-time low of 33.5 percent on 27 December 2009 but has rebounded to be in the 60s. It’s not going to get to the 90s until there are 16 million to 17 million cars, “or until we start building like we were a few years ago.”
• The annualized gallons of jet fuel consumed (in billions) fell off the ledge just like steel production. “It has been a big, big drop, and it has not stabilized yet,” Dhawan said. “There are less planes flying and less people flying.”
• The total Commercial Paper Outstanding dropped 50 percent from 2007 to 2010. The less amount of credit in the economy, the less amount of expansion there is, he said.

He called the current environment “Less Speed Ahead!” and doesn’t see gross domestic product growth “even getting into the 3-percent range.”

“In my forecast, the job recovery will be a very, very slow recovery.”

One key indicator of jobs, according to the economist, is investment in technology equipment and software as a percentage of GDP. In what he called the “golden 90s,” the per-annum percentage in this category was 12 percent, and the investment in the technology equipment and software created 240,000 jobs per month. From 2003 through 2007, the annual growth was 6 percent, and it created 132,000 jobs per month. During 2008 and 2009, that investment dropped 15 percent each year and resulted in 400,000 jobs lost each month.

“For job growth to come back, you need investment by business, which means risk taking, which means jobs,” he said.

Dhawan said he expects the investment in technology equipment and software will be back to 2007 levels during 2012.

One good thing that is happening is a slowly increasing cash flow, according to Dhawan. “When your cash flow drops 25 percent, you’re not in the mood to do rah-rah,” he said. “You are just surviving.”

Banks holding cash

The commercial bank loan charge-off ratio—which surpassed 2 percent in 2009—is troubling to Dhawan. He said a US$1 loan loss today equates to a future output loss of US$15 to US$20.

Much like the increase of savings among most Americans, banks are also hording money. The money being saved by banks is used to acquire bad banks instead of making loans.

“The returns of buying distressed banks with FDIC warranty are way, way higher than the returns of making loans,” Dhawan said, adding that there is US$1.2 trillion set aside by banks to acquire banks that fail.

“The faster and quicker the feast happens, the faster the banks can get back to lending,” Dhawan said. “The trouble is that there are not too many good banks, so private equity arms and foreign capital will come in and buy it.”

Japan, Italy, Greece, France, the United States, the United Kingdom, Spain and Ireland are in what Dhawan called the “ring of fire,” meaning the federal deficit as a percentage of GDP is a big concern as well.

“The trouble comes in when we owe money to outsiders,” he said. “That’s the problem we are facing because our biggest buyer of treasury bonds is China.”

The net-net of Dhawan’s presentation?

• Deleveraging keeps inflation at bay;
• printing money doesn’t create a single job;
• what leads to jobs is capital spending; and
• don’t expect job growth in the United States.

“So, it’s pretty rosy until that last point,” Dhawan said.