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IU OUTLOOK FORECAST: SLOW GROWTH,
BUT NO RECESSION EXPECTED IN 1999
INDIANAPOLIS -- Economists in Indiana University's Kelley School of Business said today (Nov. 5) that the trend curve for the nation's economy over the next six months resembles a banana, but they are confident that the nation will not slip into a recession.
Despite stronger-than-expected third quarter growth, the IU economists believe the U.S. economy will cool off during the fourth quarter and continue at a sluggish rate of growth into the first quarter of 1999. Then, they said, the economy will grow at a higher rate for the balance of 1999, resulting in the ninth year of continued economic expansion.
The forecast also indicates that the effects of the economic slowdown will be felt more fully in Indiana than some other areas, due to the state's dependence on durable goods manufacturing. But the impact will last only for the short term.
"It's definitely not a recession, but it is a remarkable slowdown in growth," said R. Jeffrey Green, IU associate dean of business and professor of business economics and public policy. "We expect that growth will slow down in the fourth quarter and over the next year will average 2 percent. We think that next year is going to be substantially slower than any of the last three years."
Although there have been minor fluctuations, the U.S. economy has grown at a rate of more than 2.5 percent for the last six years, and averaged 3.7 percent over the past three years.
IU Kelley School of Business professors gave their forecast in Indianapolis this morning (Nov. 5) at the kickoff presentation of their annual Business Outlook Panel state tour. A similar presentation was given today (Nov. 5) in Fort Wayne. The tour will include 10 cities over the next three weeks.
IU economists also expect that inflation will worsen a little from its current low level, back above 2 percent. If this is the case, employment will rise by about 1 million, which would be considerably below the rate of previous years and slow enough to boost the U.S. unemployment rate back to about 5 percent.
A third quarter report of a 3.3 percent annual rate of growth in gross domestic products revealed that the economy was fueled by strong consumer spending and inventory-building, but "the level of consumption is unsustainably high," said Willard Witte, IU professor of economics.
The collapse of exports has left the economy leaning increasingly on household spending. Consumption has risen 5.3 percent over the past year, and above 6 percent in the first two quarters of this year.
This spending spree has outstripped the growth in household income and caused the personal savings rate to fall to only 0.1 percent of disposable income in the second quarter. Much of the spending can be linked to the remarkable stock market advances in the last three years.
"Households have been spending well beyond their incomes and, at the same time, consumer confidence is getting a little weaker. Some slowdown in consumption is in the cards. There's really nothing much else pushing the economy forward right now,"Witte said. "Consumers are going to back off a little bit. When they do that, the thing that will be affected most will be durable goods."
Indiana -- one of the three states most dependent on durable goods manufacturing -- will feel this much more strongly than the rest of the nation, said Morton Marcus, director of the Indiana Business Research Center.
But helping soften the blow to the Hoosier state will be continued low interest rates during 1999, which will bolster new construction and the national housing market in general, Marcus said. This would improve purchases of durable goods such as major appliances built in Indiana, as well as autos. The forecast anticipates that the Federal Reserve will lower interest rates next year.
"Consumer income is likely to remain fairly steady," Marcus said. "There will be some rise in unemployment nationally and in Indiana, but not enough to dampen housing construction."
Another factor influencing the U.S. and state economies has been the turmoil abroad, particularly in Asia. A year ago and in several previous years, U.S. exports were growing at a double-digit rate, providing one of three primary supports for the U.S. economic expansion. Downturns in the economies of several Asian countries, including G-7 member nation Japan, cut deeply into U.S. exports, combined with a rise in the value of the U.S. dollar.
"We do have what can be viewed as an encouraging, relatively bullish picture, in the sense that the international economy bottoms out and we start to get a turnaround in exports," said Green, who also is co-director of the Indiana Center for Econometric Model Research.
"The negative growth rates in some of these Asian economies were so phenomenal in 1998 that it's almost a mathematical certainty that it can't get much worse."
The IU forecast also projects that the value of the dollar will decline, relative to other currencies.
In Indiana, one industry that has been hit hard this year has been steel. Marcus said global trends outlined in the forecast will help state steel producers who have felt squeezed by cheaper producers abroad.
One casualty of the dip in the state economy may be tax reform efforts, Marcus said. "Members of the General Assembly will have economic information available through the winter months, and what they probably will be seeing is a weakening in some of those figures, which may make them extremely cautious about any kind of tax cuts."
Looking ahead to the year 2000, IU economists do not expect a millennial computer catastrophe like some have predicted. But the forecasters believe many companies will worry enough about it to build up inventories at the end of next year. This will help to increase economic activity at the end of 1999, followed by an inventory runoff in early 2000, assuming there is no masive computer failure.
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 Business Outlook Panel was founded in 1972 as a service to bring current economic information to the state's business communities. It is sponsored by the Kelley School of Business, the IU Alumni Association, IU campuses and local chambers of commerce.
Today's presentations were one of 11 that will be given in 10 Indiana cities. The panel also will appear in Kokomo on Friday (Nov. 6); Richmond and Anderson, Nov. 10; New Albany and Evansville, Nov. 12; Schererville, Nov. 13; and Columbus and Bloomington, Nov. 17.
A more in-depth report will be published in the January issue of the Indiana Business Review. For more information, contact the Indiana Business Research Center at 812-855-5507.
(George Vlahakis, Office of Communications and Marketing, 812-855-0846, gvlahaki@indiana.edu)