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Economic expansion to continue into record-setting 11th year
Nov. 9, 2000
NOTE: The panel's opening presentation was taped for broadcast on the Web. Users will need RealPlayer and can access the presentation at http://broadcast.iu.edu later today.
INDIANAPOLIS -- The next president of the United States may not have a clear public mandate because of the close election, but he will benefit from a continued strong economy next year, according to a forecast presented here today (Nov. 9) by economists in Indiana University's Kelley School of Business.
The United States has enjoyed an economic expansion that began in March 1991, and members of the Kelley School's Business Outlook Panel said this pattern of growth will continue into the year 2001, although at a modestly slower pace than in the previous two years.
"In the past couple of years, it probably has been about as good as it can get. The best we can hope for is more of the same, but a more realistic expectation is that the economy will decelerate to some degree," said R. Jeffery Green, the Kelley School's associate dean for research and operations and co-director of the Indiana Center for Econometric Model Research.
"We expect that output growth over the next year will be at about 3.5 percent. This is significantly below the past year and a little below the previous three years," Green said. "But this means that the economic recovery will continue into a record-setting 11th year."
The economic story will be similar in Indiana, although the state's economic expansion will be dampened somewhat by manufacturing and housing trends.
The IU professors said the nation's gross domestic product will rise by 3.5 percent in 2001 and inflation will remain contained at no greater than 2.6 percent. The consumer price index measure of inflation will be slightly higher at 3.3 percent. Consumer spending will slow for the second straight year, but still will rise by just less than 3 percent.
Slower overall growth will constrain many households' ability to pay for new and existing housing. Housing starts have been slowing throughout the year, falling from 1.7 million units in 1999 to 1.6 million in 2000. IU's forecast indicates that housing starts nationally will be down to 1.5 million next year.
"In the absence of any major shocks, our soft-landing scenario suggests stable interest rates," Green said. "Countervailing forces will keep both short- and long-term rates from changing markedly in the coming year. Whereas the slowdown dictates somewhat lower interest rates, the prospect of even temporary increases in inflation puts upward pressure on returns."
The same forecast was presented today in Bloomington. The two presentations are the first in a statewide tour that will include 10 cities over the next three weeks. The annual forecast is prepared by a group of IU economists who use the Indiana Econometric Model as their starting point. The model combines state statistics and a national forecast to develop projections for the coming year. The panel has presented an annual forecast since 1972.
Morton Marcus, director of the Indiana Business Research Center, said that a slowdown in consumer spending on durable goods and housing will keep the state from keeping pace with the nation. But Indiana's outlook remains good overall for next year.
"With serious questions about consumer spending, Indiana will continue its pattern of not keeping up with the nation, but will still have a good year," Marcus said. "Fundamentally, it's because we're still geared heavily to manufacturing industries that traditionally include consumer durables, automobiles, appliances and all the things that go into them."
According to the forecast, the U.S. economy will produce at least a half million jobs in 2001. That rate won't keep up with the supply of labor, so the unemployment rate will increase marginally to 4.3 percent. Marcus said Indiana will share in this growth with 20,000 new jobs next year and an unemployment rate below the national level.
"Unemployment is at an unusual low, which we attribute to a strong economy," he said. "We expect that the unemployment rate will rise, but not to where it is a significant problem. People who are looking for work will find plenty of jobs to choose from. Employers will continue to find qualified people."
The personal income of Hoosiers will grow at a lower rate in 2001, 4.3 percent, compared to an estimated 5.1 percent this year.
Since 1993, the U.S. economy has grown at a rate in excess of 2.5 percent, by more than 4 percent in the last four years and by more than 5 percent in 2000. At the same time, inflation has not been much of a factor, even with increased energy costs.
Worldwide, economic growth is expected to slow down in 2001 as a result of the recent oil shock, which is expected to be temporary, said Michele Fratianni, the W. George Pinnell Professor and chair of business economics and public policy. He said oil prices are bound to remain high throughout the winter.
"The short-term supply of oil is very inelastic to prices; the demand is also very inelastic to prices," Fratianni said. "Consequently, if the demand for heating oil were to rise in response to a harsh winter, oil prices would be bound to rise before falling.
"Over the medium run, the supply of oil is responsive to oil prices. Oil producers will find it profitable to extract more oil from existing wells and bring to production new wells. Experts indicate that it takes approximately six months for the supply of oil to adjust to the higher oil prices. Until then, oil supply will remain relatively rigid," he said.
The U.S. trade deficit will moderate somewhat from the historical high of this year: it will be close to $400 billion in 2001, or little more than 4 percent of GDP. The value of the dollar in the exchange markets will depreciate in 2001, following the appreciation in 2000. Japan is still struggling, and Argentina may be the next target for a currency crisis.
Concerning international trade involving Indiana companies, Lawrence S. Davidson, director of the Global Business Information Network at IU, said Indiana export growth has outperformed the nation during the first half of 2000.
This largely has been because of increased sales of transportation equipment to Canada and metals and electronic equipment to Mexico. Export sales growth to Mexico over the year from June 1999 to June 2000 exceeded 260 percent. "We look for another year of double-digit Indiana export sales growth in 2001," Davidson said.
Other panelists at the Indianapolis presentation were Dan Dalton, dean of the Kelley School of Business, and Robert J. Kirk, IU professor of economics from the Indianapolis campus. The panel also will appear in Evansville on Nov. 10; Richmond and Anderson, Nov. 14; Columbus, Nov. 16; Schererville, Nov. 17; Kokomo and Fort Wayne, Nov. 21; and New Albany, Nov. 22. Regular panelists will be joined in most cities by an economist from that particular area who has prepared a forecast for the local economy.
(George Vlahakis, 812-855-0846, gvlahaki@indiana.edu)