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Jerry Conover
Indiana Business Research Center
conover@indiana.edu
812-855-7476

Bill Witte
Center for Econometric Model Research
witte@indiana.edu
812-855-2080

Kyle Anderson
Kelley School of Business
kyjander@iupui.edu
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George Vlahakis
University Communications
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Last modified: Thursday, November 4, 2010

IU Kelley School forecast: Economic recovery in 2011 will continue to be 'disappointingly weak'

FOR IMMEDIATE RELEASE
Nov. 4, 2010

Editors: Audio of the entire presentation is available online at http://broadcast.iu.edu/.

INDIANAPOLIS -- Indiana University economists presenting their annual forecast today (Nov. 4) expect that the current historically weak recovery will continue into 2011, with continued challenges for the national labor market.

"The past year has been one of disappointingly weak recovery, and, sadly, we expect that 2011 will bring more of the same," concluded Bill Witte, associate professor emeritus of economics at IU and a member of the Kelley School of Business' annual Business Outlook Panel.

"The watchword for the economy going into the New Year is uncertainty -- uncertainty about the political climate; uncertainty about taxes; uncertainty about commodity prices; uncertainty about Fed policy and interest rates; uncertainty about the dollar," Witte added. "Until some of this uncertainty is removed, the prospects for a robust recovery will remain dim."

Witte, who also co-directs the Center for Econometric Model Research at IU, remarked that the U.S. economy has been a model of "diabolical consistency." In 2008 and the first half of 2009, it produced the worst recession since the Great Depression. Since then, it has produced the worst recovery since World War II.

Over the five quarters since the economy hit bottom, total growth has totaled only 3.5 percent. By the declared end of the Great Recession in June 2009, private sector employment had shrunk by 6.1 percent (more than 7 million jobs), and it continued to decline after recovery began. Witte said the recovery also seems to have lost momentum.

The Kelley School panel said the economy overall will expand at about a 3 percent rate in 2011, between the fourth quarters of this year and the next. "This will be a little better than 2010, but not enough to make much progress against the damage done during the recession," Witte said.

This is a much more sluggish recovery than typical after past recessions.

While slow economic growth also is expected for both the state of Indiana and the metropolitan Indianapolis area, members of the Kelley School panel do see signs that job growth may be a little better in the Hoosier state than elsewhere.

Jerry Conover, director of the Indiana Business Research Center, noted that Indiana's real gross domestic product (GDP) growth has trailed the nation for several years, but this year it appears to be outpacing the nation modestly. He believes that Indiana's output will accelerate in 2011, growing by 3 to 4 percent over 2010 levels.

He noted that while the recession hit Indiana workers hard -- payroll jobs declined by 7.6 percent during that period. The state ranks fifth nationally in terms of the rate of job growth in 2010. Indiana has regained about 18 percent of the jobs it has lost -- attributable largely to gains in private education and health care services and public sector employment. Construction employment in Indiana remains near the bottom. Manufacturing, which also was hit hard, is slowly growing.

Conover said 2011 payroll growth in Indiana will remain at around its current 2 percent level, which would add about 50,000 jobs. "The increase is from a very weak base level," he said. "We probably won't hit pre-recession peak employment until 2013 or beyond."

Similarly, the Indianapolis metropolitan area will continue to recover slowly over the course of 2011. "However, the recovery will be modest and leave economic growth below historic levels and unemployment above normal levels, even by the end of the year," said Kyle Anderson, clinical assistant professor of business economics in the Kelley School of Business at Indianapolis.

"The coming year should bring some modest improvement to the Indianapolis economy," Anderson said. "The recession of 2008-09 did not hit Indianapolis as hard as the rest of the state. Unfortunately, the recovery has less steam here as well."

As a result, Anderson suggests that rate of growth of economic output in Indianapolis will be between 2 to 3 percent, and still significantly below pre-recession levels between 2003 and 2006.

The panel released its forecast this morning at the Columbia Club in Indianapolis. It also will present national, state and local economic forecasts in nine other cities across the state through Nov. 16. A detailed report on the outlook for 2011 will be published in the winter issue of the Indiana Business Review, available in December on the Web at www.ibrc.indiana.edu/ibr.

Here are other highlights from today's forecast:

  • Joblessness will remain a challenge, with the unemployment rate for the state still above 9 percent for most of 2011
  • Reflecting modest projected jobs growth, Indiana's personal incomes will rise moderately but consistently through 2011, averaging about 3.5 percent in current dollars.
  • 2011 will be marked by very low inflation nationally, below 1 percent, which will continue through the coming year, as consumer spending is expected to rise very slowly.
  • The housing sector has hit bottom nationally, but the large overhang of homes facing foreclosure will prevent any significant rebound in construction during most of 2011. In Indiana, the housing market will show some growth; but, like the overall economy, it will be muted.
  • The Federal Reserve will maintain its near-zero position on short-term interest rates through 2011. Mortgage rates will remain quite low by historical standards, though some rise from this year's bargain-basement levels is likely. Lenders will continue to be tight with credit.
  • Energy prices are expected to rise moderately in 2011 in the absence of any major supply or security disruptions, with oil prices remaining below $80 per barrel.
  • The federal budget deficit will remain very high, and any congressional efforts to contain it will likely have an impact only slowly. State and local budgets will remain strained by slow revenue growth, the disappearance of federal stimulus spending, and weakened property values.
  • The world economy is expected to grow by 4.2 percent in 2011, down from this year's pace. Mounting tensions are building between the advanced economies and the emerging economies, reflecting the uneven pace of recovery (2.2 percent for developed countries vs. 7 percent for emerging countries). Responses to such tensions could limit the role of export growth in boosting the U.S. economy.

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.

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 at http://newsinfo.iu.edu/news/page/normal/15977.html.