INDIANAPOLIS, Ind.—In this election year, voters repeatedly list the economy as their number one concern. Just days before the election, Indiana University Kelley School of Business economists presented their annual economic forecast, and unfortunately, they expect the United States economy to underachieve relative to economists’ unambitious expectations.
And like a year ago, a considerable list of things could adversely upset their expectations, chief among them and most immediate, the “fiscal cliff,” a potential economic growth-killing combination of higher taxes and government spending cuts.
“Without congressional compromise—something we have little experience with recently—a long list of tax increases and spending reductions will go into effect on Jan. 2,” said Bill Witte, associate professor emeritus of economics at IU and a member of the panel. “If ‘C-Day’ were to materialize, it would almost certainly put the economy back into recession with negative growth for much of next year, decline in employment and rising unemployment.
“In fact, the uncertainty about the situation is already having an impact on business decisions. In the third quarter, investment in plant and equipment actually declined. The tepid pace of hiring probably also reflects this ambiguity,” Witte added.
Other ongoing concerns include Europe’s lack of progress in dealing with its sovereign debt problems and China’s transitioning to a slower growth path. The Business Outlook Panel sees these problems as chronic.
“We expect that 2013 will be generally similar to 2012: unacceptably slow growth, without much progress in the labor market,” Witte summed up.
The panel expects the national economy overall will expand by about 2.5 percent next year—if the economy does not go over the fiscal cliff. This will be better than the 1.7 percent so far this year, because of somewhat better household spending, improvements in the housing market and less drag from the government sector, but not enough to make much of a dent in unemployment.
They forecast modest employment growth, with the national economy generating about 2 million new jobs. The unemployment rate will remain above 7 percent. Inflation will remain close to 2 percent.
In Indiana, the employment story has been somewhat better than expected. Jerry Conover, director of the Indiana Business Research Center, said the state’s economic recovery made notable progress in 2012.
“From the peak just before the recession to the trough, Indiana payrolls shrank by 200,000 jobs. Since then, they’ve grown slowly but steadily by 150,000. So far this year, payroll employment is averaging more than 52,000 above last year’s levels, and the growth is accelerating,” Conover said. “This growth rate is comparable to the heady days of the late 1990s.
“This is a more appealing picture than we painted last year for Indiana, and for the year ahead our forecast calls for sustained growth—payroll job growth of more than 50,000 jobs in 2013,” he added. “At this rate, we’re still about two years away from our pre-recession employment level.”
Real personal incomes in Indiana will rise a bit less than 2 percent in 2013, with per capita incomes growing by about $1,500. The state’s overall economic output will grow by about 2.3 percent, comparable to the national rate.
The panel released its forecast Nov. 1 at the Columbia Club in Indianapolis. It also will present national, state and local economic forecasts in eight other cities across the state through Nov. 20.
The Indianapolis metropolitan area should continue to see slow growth, according to Kyle Anderson, clinical assistant professor of business economics in the Kelley School of Business Indianapolis.
“Job growth has been weak, but the unemployment rate has declined to 7.1 percent due to a shrinking labor force,” Anderson said. “Housing remains a weak spot in the Indianapolis economy, but construction is beginning to pick up.”
Rob Neal, an associate professor of finance also at Kelley Indianapolis, presented his predictions for financial markets.
“I look at what we might expect for interest rates and investment opportunities,” said Neal, who offers a cautious financial market outlook for 2013. “The primary focus here is on individuals. People are interested in forecasts for the economy. I interpret what it means for financial markets—the stock market and bond market.”
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’s 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 2013 will be published in the winter issue of the Indiana Business Review, available online in December.
Here are other highlights from today’s forecast:
- The housing sector has finally hit bottom nationally, and the wave of foreclosures is starting to recede. Not only are prices starting to rise, but new housing construction will be a bright spot in the economic picture.
- The Federal Reserve will again continue to maintain its near-zero position on short-term interest rates. Mortgage rates will remain at historic low levels, but lenders will finally begin to loosen the reins on credit.
- In the absence of major supply or security disruptions, energy prices will remain relatively flat in 2013, with oil prices averaging at or below $90 per barrel. Rising domestic energy production will be another bright spot in the economy.
- Stock market values should climb slowly next year, well below long-term growth rates. Earnings forecasts and low interest rates are encouraging for stock prices, but uncertainty about fiscal policy and foreign economies will hamper growth.
This year’s tour is sponsored by IU’s Kelley School of Business, the IU Alumni Association, IU campuses and various community organizations. A complete schedule of the Business Outlook Panel tour is available online.