IU Kelley School of Business panel presents somber economic forecast for 2017
INDIANAPOLIS — In presenting the Indiana University Kelley School of Business' annual economic forecast for 2017, faculty offered a somber view and even raised the possibility that their forecast could be wishful thinking.
"The U.S. economy during 2016 has underperformed, even relative to our diminished expectations a year ago," said Bill Witte, associate professor emeritus of economics at IU. "Looking to the future, we see little reason for any real optimism, but we do think the economy will continue to muddle through, matching the past year, or perhaps do a little better."
As in 2015 and this year, the IU Kelley School economists expect output growth nationally next year to average only slightly above 2 percent.
In reaching their forecast, the IU Kelley faculty noted that job creation has slowed and the decline in unemployment appears to have ended as the labor market reaches full employment. The household sector appears to be in good shape, and consumption has been quite strong.
"At the same time, every other part of the economy is lackluster or worse. This lack of balance is troubling for the present and unsustainable for the future," Witte said. The forecast "depends on at least some improvement in investment — both business and housing — and government spending. This will offset a modest deceleration in consumer spending, bringing the latter into better balance with income growth."
The news for Indiana is slightly better as the state should begin to outperform the country due to greater demand for its goods and services, said Timothy Slaper, research director of the Indiana Business Research Center in the Kelley School.
"In terms of gross domestic product growth, 2016 looks to reverse the trend of Indiana underperforming the overall nation. We currently forecast that 2016 will close out with real economic growth of 3 percent, compared to between 1.6 and 2 percent nationwide," Slaper said. "Indiana has trailed the United States in GDP growth in four of the past five years but is expected to grow at a slightly faster rate than the U.S. through 2018."
Some of the strongest activity in Indiana has taken place in the Indianapolis-Carmel metropolitan statistical area, reflecting broader growth in urban economies while more rural economies continue to struggle, said Kyle Anderson, clinical assistant professor of business economics at the Kelley School Indianapolis.
"Overall, the Indianapolis economy continues to be fairly healthy," Anderson said. "The region is at full employment, and continued job growth will ensure that it stays there. Further, low unemployment and continued growth should lead to higher wages for workers. Low interest rates will continue to encourage residential construction."
The school released its forecast this morning at the Conrad Indianapolis Hotel and will present it again at 11:30 a.m. today at Indiana Memorial Union in Bloomington. The Business Outlook Panel tour also will present national, state and local economic forecasts in eight other cities across the state through Nov. 18.
The continued sluggish economic growth has surprised many longtime observers, including members of the panel. But it can't be suggested that they were overly optimistic.
Two years ago, the IU Kelley panel expected the economy to break out of its "2 percent slog" to reach growth of about 3 percent, only to see actual growth of just 1.9 percent for 2015. They were less optimistic about 2016, forecasting growth of 2.5 percent. Over the first three quarters of this year, real GDP has averaged just 1.7 percent.
This year, Witte noted "a long list of risks that could make our pessimism end up being wishful thinking." They include uncertainty about structural economic issues in China and across Europe, whether Federal Reserve moves could trigger a broad financial market event and lingering doubts about the federal government working together after one of the most contentious elections in modern history.
Looking ahead to 2017, the panel said the national labor market should match its current performance. Job gains will average below 150,000 per month, with little — if any — decrease in the unemployment rate.
Outlook for Indiana
Slaper, who prepared the state's forecast with Ryan Brewer, assistant professor of finance at Indiana University-Purdue University Columbus, said Indiana will benefit from developing a more diversified manufacturing base during this decade.
The state no longer depends as much on auto manufacturing and "has added additional defensive presence with life sciences and global transportation business, each of which are expected to grow from 2 to 6 percent over the coming year," Slaper said.
"Indiana also has a healthy blend of a comparatively low unemployment rate alongside an increasing labor force participation rate," he said. "Indiana has the youngest population in the nine-state peer group, which can help in terms of generating productivity — particularly now — as the United States enters the front-end of retirements for the baby boomers."
In addition to its neighboring states, Indiana's peer group of manufacturing heavy states includes North Carolina, Oregon, Iowa and Wisconsin. Over the past 10 years, Hoosiers have outpaced residents in these states in earning baccalaureate degrees, while overall educational attainment lags behind.
National auto sales remain important to the state's economic picture. 2016 has been a great year for auto sales and could match the 17 million units in the previous year. But higher productivity also means that employment at Indiana auto sector companies is lower — from 3.5 percent of Indiana workers in 2005 to 2.9 percent in 2015.
Outlook for Indianapolis
High-profile plant closings have been in the news recently, but the Indianapolis economy is nearing full employment, Anderson said. Differences in unemployment between Indianapolis and the rest of the state can largely be attributed to differences in educational attainment.
"More than 30 percent of Indianapolis residents have a bachelor's degree or higher, whereas across the rest of the state, that number is closer to 20 percent," he said. "Given the current unemployment rate for college grads of 2.5 percent, it is not surprising that Indianapolis has lower unemployment and higher wages.
"In spite of strong job growth and low unemployment, real average wages have been flat over the last two years. Much of the growth in jobs has come from lower-paying sectors or in areas where real wages have declined, such as in health care," he added. "Higher-paying industries, such as manufacturing, have seen losses in jobs, which leads to lower overall wages.
"High-profile plant closings in 2016 have made headlines, but these are part of broader trends. Manufacturing is a strong segment of the Indianapolis economy, but technology and efficiency have led to increasing output without a corresponding increasing workforce."
Other highlights from today's forecast:
- Inflation rose in 2016 and will average about 1.5 percent for this year. This trend should continue in 2017, with the personal consumption expenditures measure preferred by the Federal Reserve expected to reach its target 2 percent rate by year's end.
- The panel expects that the Federal Reserve will again raise rates in December and twice more in 2017.
- With both presidential parties talking about investing in infrastructure, some kind of deal is possible next year, but don't expect it to have much of an impact until 2018.
- Consumer spending will continue to increase but at a rate lower than this year.
- Business investment and housing will grow but at rates below those earlier in the economic recovery after the Great Recession.
- The trade balance will further deteriorate, even with some increases in export growth.
The starting point for the forecast is an econometric model of the United States, developed by IU's Center for Econometric Model Research, which analyzes numerous statistics to develop a national forecast for the coming year. A similar econometric model of Indiana provides a corresponding forecast for the state economy based on the national forecast plus data specific to Indiana. The Business Outlook Panel then adjusts the forecast to reflect additional insights it has on the economic situation.
A detailed report on the outlook for 2017 will be published in the winter issue of the Indiana Business Review, available online in December. In addition to predictions about the nation, state and Indianapolis, it also will include forecasts for other Indiana cities and key economic sectors.
This year's tour is sponsored by IU's Kelley School of Business, the IU Alumni Association, IU campuses and numerous community organizations. A complete schedule of the Business Outlook Panel tour is available online.