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2000 IU Business Outlook forecast: economic expansion to continue, sluggishly
Nov. 4, 1999
INDIANAPOLIS -- The final years of the 20th century will go down in history as one of the most remarkable periods in U.S. economic history. This American success story will continue into the next millennium, even as a truly global economy emerges, said Indiana University professors in a forecast presented today (Nov. 4).
"Since the end of the last major recession in 1982, real GDP (gross domestic product) growth has averaged 3.5 percent per year, well above the 2.9 percent per year rate in the preceding 17 years," observed R. Jeffery Green, associate dean of IU's Kelley School of Business. "Once the great recession of 1980-82 was completed, only one very short recession was recorded in the next 17 years, an achievement unprecedented in the more than 150 years over which recessions have been recorded."
The forecast, presented today in Indianapolis by faculty of IU's Kelley School of Business, projects that the U.S. economy will slow down in 2000, but not fall into recession. The nation's gross domestic product is expected to grow by 2.8 percent and inflation should be no greater than 2 percent next year. The consumer price index measure of inflation will be slightly higher at 2.4 percent.
Consumer spending on durable goods and housing will grow more slowly after unexpected and unsustainable increases in 1999. The savings rate will rise slightly from what is now a historically low level.
The Kelley School of Business panel also will present their forecast in nine other Indiana cities over the next two weeks, including at Kokomo and Fort Wayne tomorrow (Nov. 5). At each location, they will be joined by a guest panelist from another IU campus or state university, who also will present a forecast.
"We believe both the consumer goods and housing sectors will slow next year," said Green, also co-director of the Indiana Center for Econometric Model Research and a business economist. "The Fed (Federal Reserve) has engineered two increases in interest rates this year and one or two more moves are likely.
"Housing markets are already beginning to show signs of slower growth. Predicting where equity markets will go is always hazardous, but interest rate increases typically cool markets, and the tremendous growth seen in the past few years seems unlikely to continue," he said. "With housing weakening and consumer spending growth slowing, we anticipate real GDP growth will slow to around 2.8 percent next year, very close to a trend rate."
Short-term interest rates will creep up in 2000 and average above 5.5 percent. Long-term rates could average 50 basis points above their level in 1999, but probably will stay below 7 percent. Slower overall economic growth will constrain the household's ability to pay and higher mortgage interest rates will increase the cost of housing, the IU economists said. Housing starts will be down in 2000 to 1.56 million units. New home sales will contract by around 7 percent.
Michael Simkowitz, professor of finance, said rising interest rates suggest much less growth in equity prices. Any major unexpected announcements relating to earnings, economic growth or Federal Reserve policy could cause a significant decline in stock prices.
"The market's optimism about earnings is troubling. I don't think that we will get the growth in operating earnings that it seems to be expecting," Simkowitz said. "By no means am I expecting a contraction in the general economy, but any disappointment could cause a significant decline in stock prices since there is no margin for error built into these high P/E ratios.
"The next 12 months should see returns on stocks in the single digits with a fair amount of volatility," Simkowitz added. "The total return in the long-term bond market may not even achieve positive returns."
The Indiana economy likely will lag behind that of the nation due to its dependence on manufacturing of big-ticket items, said Morton J. Marcus, director of the Indiana Business Research Center.
"A slowdown in consumer spending on durable goods and housing will keep Indiana from advancing at the national rate," Marcus said. "Nominal personal income growth -- approximately 5.2 percent in 1999 -- should come in around 4.7 percent in the first year of the next century."
The IU forecast said the U.S. economy will produce over 1 million new jobs in 2000, leaving the unemployment rate largely unchanged at 4.3 percent. Indiana should share in this growth with 25,000 new jobs and an unemployment rate below the national level.
Internationally, the U.S. trade deficit could deteriorate further in 2000, but only marginally, from the historically high trade deficit of this year, said Lawrence Davidson, director of the Global Business Information Network and professor of business economics and public policy. The value of the dollar will depreciate in 2000, following a significant decline in the last half of 1999.
Indiana's export growth outperformed the nation's during the first half of 1999, largely because of increased sales of transportation equipment to Canada and electronic equipment to Mexico. Stronger world economic growth in 2000 could mean a return to double-digit state export sales growth next year, Davidson said.
The annual forecast of economic conditions is prepared by a group of IU economists and business professors who specialize in analyzing national and state business conditions. The starting point for the forecast is the Indiana Econometric Model, which combines state statistics and a national forecast to develop projections for the coming year.
The IU Business Outlook Panel was founded in 1972 by the Kelley School of Business as a service to bring current economic information to the state's business communities.
Other panelists at the Indianapolis presentation were moderator Dan Dalton, dean of the Kelley School, and Robert J. Kirk, IU professor of economics from the Indianapolis campus.
The Indianapolis event is one of 11 presentations that will be given in 10 Indiana cities. The panel also will appear in Kokomo and Fort Wayne on Nov. 5; Richmond and Bloomington, Nov. 9; Columbus, Nov. 10; Anderson, Nov. 11; Schererville, Nov. 12; and Evansville and New Albany, Nov. 16. This year's tour is being sponsored by the Kelley School of Business, the IU Alumni Association, IU campuses and local chambers of commerce.
A more complete analysis of the economic outlook for 2000 will be available in the forthcoming issue of the Indiana Business Review. Free subscriptions for Indiana residents are available from the Indiana Business Research Center, 501 N. Morton St., Bloomington 47404.
(George Vlahakis, 812-855-0846, gvlahaki@indiana.edu)