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IU Kelley School forecast: Economy in 2012 will improve but 'not enough to make much of a dent'

Indiana University economists said in their annual forecast that they expect national and state economies will expand somewhat more in 2012 but not enough to make much of a dent in unemployment, thus leading to a continued historically weak recovery.

The Kelley School of Business' annual Business Outlook Panel expects the economy overall will expand by between 2.5 and 3 percent next year. Modestly rising output will lead to sluggish national employment growth of perhaps about 2 million jobs, which would allow the unemployment rate to decline only slightly to about 8.4 percent by next December.

Business Outlook Panel

Left to right at table, Timothy Slaper, Jerry Conover, Charles Trczinka and Bruce Jaffee. Kelley School Dean Dan Smith, at the podium, served as the moderator.

Print-Quality Photo

In Indiana, payroll growth should increase by 1.5 percent, with most sectors showing some growth. However, the Hoosier state shouldn't expect to reach pre-recession employment until 2014. The Indianapolis-Carmel metropolitan area should continue its slow recovery.

"The United States economy in 2011 has managed to under-achieve even relative to our unambitious expectations," said Bill Witte, associate professor emeritus of economics at IU and a member of the panel. "We see continuing tepid economic recovery during 2012, with disappointing output expansion, low inflation, and a small decline in unemployment. This is better than a slide back into recession, but is a long way from an optimistic outlook."

Witte attributed the nation's current economic malaise to two factors -- the earthquake and tsunami that hit Japan in April and the failure of the national and international political sectors to respond on major policy issues.

"The disruption to supply chains that the Japanese disaster produced had a temporary, but clearly negative, effect during the summer," Witte said. "The man-made component is the inability of the political sector -- both domestically and abroad -- to face up to the necessity to make some tough decisions.

"At home this has manifested itself as a series of deadline-driven crises that have all ended with a non-decision to delay any substantive action. The cumulative effect has been to ratchet up uncertainty and destroy what remains of household and business confidence that policy will shift from being mostly counter- productive to being a positive force for sustained recovery," he added. "The global component is centered on Europe and its sovereign debt situation. As in the U.S., leaders have taken half steps that are mostly designed to avoid the fundamental problem and to delay the point of real decision."

Looking to the future, progress on these political problems appears unlikely in the near term, and the economic picture for 2012 will be very similar to that of 2011: uncomfortably slow growth, without much improvement in the labor market.

In Indiana, there are some encouraging signs. About 40,000 jobs will be added to Hoosier payrolls in 2012 as the economy picks up, perhaps more quickly near the end of the year. Indiana unemployment could drift down to 8 percent by the end of the year.

Jerry Conover, director of the Indiana Business Research Center, noted that Indiana's real gross domestic product rose by 4.6 percent in 2010, the third-fastest increase in the nation, as manufacturing rebounded. But this year it has slowed to 2.2 percent due to shrinkage in government and construction employment.

He believes that Indiana's economic output -- as measured by real GDP -- will grow by 3.1 percent in 2012 and faster than the nation. Relatively stronger growth is expected in financial, education and health, and professional and business sectors. Manufacturing and trade jobs also should see some growth.

Holding growth back will be weakness in the construction, government and financial services sectors. "While we expect home construction to pick up steam in 2012, perhaps by 30 percent or more, that would still be only half of pre-recession levels," Conover said.

"Hoosiers' real personal income has kept pace with the nation since the recession began and now it's starting to rise again. We expect it to grow about 2 percent overall in 2012 after briefly starting out negative," he added.

As employment slowly rises and foreclosures start to abate, Indiana home sales could grow by 15 to 20 percent next year.

The Indianapolis metropolitan area should see a modest decline in unemployment and a slight increase in personal incomes, according to Kyle Anderson, clinical assistant professor of business economics in the Kelley School of Business at Indianapolis.

"The Super Bowl in February will bring a nice, but temporary, economic stimulus," Anderson said. "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."

The panel released its forecast Thursday (Nov. 3) at the Columbia Club in Indianapolis. It also is presenting national, state and local economic forecasts in nine other cities across the state through Nov. 29. A detailed report on the outlook for 2012 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 the forecast:

  • Inflation will be slightly above 2 percent in 2012. Consumer spending will rise moderately.
  • The housing sector has finally hit bottom nationally, but the large surplus of homes, coupled with persistent unemployment will keep home construction and prices from rebounding much next year.
  • The Federal Reserve will continue to maintain its near-zero position on short-term interest rates well into 2013. Mortgage rates will remain at historic low levels. Lenders will continue to be tight with credit.
  • In absence of major supply or security disruptions, energy prices will be relatively flat in 2012, with oil prices averaging around $90 per barrel.
  • The federal budget deficit will remain high and any congressional efforts to reduce it will have little immediate impact. State and local budgets will remain tight due to reduced federal transfers, slow revenue growth and stagnant property values. Stock market values should climb slowly, well below long-term growth rates. Earnings forecasts and low interest rates will be encouraging for stock prices, but uncertainty about fiscal policy and foreign economies will hamper growth.
  • World economic growth is expected to slow down to around 4 percent in 2012. Weaknesses in key foreign markets -- particularly Europe -- could limit the ability of U.S. exports to spur economic growth here.

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.