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Last modified: Thursday, November 7, 2002

Business Outlook Panel foresees continued recovery

Editors: The panel's other presentation Thursday (Nov. 7) in Bloomington will be taped for rebroadcast on the Web. Users will need RealPlayer 8 and will be able to access the presentation at http://broadcast.iu.edu by late afternoon on Monday, Nov. 11. A complete schedule of the panel's tour stops across the state can be found at http://newsinfo.iu.edu/news/normal/page/609.html.

INDIANAPOLIS -- The national economy will continue to recover from recession in early 2003 and will avoid a "double-dip" downturn that had been feared by some economists, according to a forecast presented today (Nov. 7) by economists in Indiana University's Kelley School of Business.

In Indiana, the forecast indicates that total employment and the economy will improve, but funding for services provided to Hoosiers by state and local governments will lag behind.

According to the forecast, the national economy will continue to grow next year at this year's rate, with the consumer continuing as the key to growth. Investment spending by firms, which plunged during the recession, should stabilize and begin to grow. The gross domestic product (GDP) is expected to increase by 3.2 percent in 2003.

"Overall economic growth next year will be much like this year, but the sectors contributing to that growth will be a little different," said R. Jeffery Green, co-director of the Indiana Center for Econometric Model Research and professor of business economics and public policy.

"I don't believe that the consumer is going away," Green said. For example, steady auto sales and a strong housing market are expected to continue. Business investment -- which has been lagging -- should pick up as the year advances and provide some strength to the economy's expansion.

The IU panel forecasts that the Consumer Price Index measure of inflation will continue to hover at just above 2 percent and that national unemployment will approach 6 percent. "Both the low inflation and the steady unemployment are the result of an expected continuation of excellent productivity growth," Green said.

Morton Marcus, director of the Indiana Business Research Center, said he expects state employment to turn around in 2003, with the the addition of 30,000 jobs. Over the last two years, Indiana has lost about 100,000 jobs.

"The wind is back in the sails of the state economy," Marcus said. "It will be the first time in several years that the state has experienced growth in total employment."

Steady sales of automobiles and home-related items will help the Indiana economy, which benefits from durable goods purchases. Also, an increase in jobs at service-oriented firms should fuel employment growth in the state next year.

Marcus explained that the loss of employment in Indiana has not only been a result of the economic downturn, but also because of a consolidation of utilities and financial institutions in Indiana, which are now poised for growth.

On the other hand, services provided by state and local government will not increase. "We're looking at a situation where state and local governments are going to be hard-pressed to fund services," Marcus said. "It will probably take another year before that situation begins to improve. Revenues tend to lag behind economic performance, particularly on the upside.

"There is also tremendous uncertainty about the proposed reassessment of property in the state. People don't know what's going to happen and there is some hesitation in the state to build new homes or improve homes because people don't know what's going to happen next," he said. "One of the responsibilities of the General Assembly will be to clarify the property tax situation."

Expansionary federal government spending will be largely offset by contractions in state and local expenditures.

Taking a look abroad, economic growth worldwide is projected to be 2.2 percent, reported Andreas Hauskrecht, visiting assistant professor of business economics and public policy.

"The world still lacks a power engine, a growth locomotive that helps other regions to pull out of economic struggle," Hauskrecht said. "The recovery in the United States as well as in Europe is more modest than originally hoped. Japan is still stuck in a coincidence of deflation and a very low growth rate of GDP with the imminent risk of a fall-back into recession.

"Gleams of hope are the prospects for Southeast Asia and to a smaller extent for Middle and Eastern Europe and Russia, while Latin America is on the brink of an economic collapse," he said.

Robust productivity growth in the United States compared to other nations will keep the U.S. dollar strong and contribute to the current account deficit.

A major risk to today's forecast comes from the uncertainties about a war with Iraq. Even if the war does not develop, the threat of war keeps petroleum prices high and investors on edge.

The same forecast was presented today in Bloomington. The two presentations are the first in a statewide tour that will include nine cities over the next two 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.

Other panelists at the Indianapolis presentation were Kelley School Dean Dan Dalton and Robert S. Neal, associate professor of finance.

The panel also will appear in Columbus on Friday (Nov. 8); Richmond and Anderson, Nov. 12; Fort Wayne, Nov. 13; Kokomo, Nov. 14; Schererville, Nov. 15; and New Albany and Evansville, Nov. 19. Regular panelists will be joined in most cities by an economist from that particular area who has prepared a forecast for the local economy.

A more detailed report on the Business Outlook Panel will be available in the December issue of the Indiana Business Review and online at www.ibrc.indiana.edu.