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George Vlahakis
University Communications

Jerry Conover
Indiana Business Research Center

Bill Witte
IU Department of Economics

Phillip Powell
Kelley School of Business

Last modified: Wednesday, October 31, 2007

Kelley School of Business panel 'cautiously optimistic' in 2008 forecast

Nov. 1, 2007

INDIANAPOLIS -- Last year, economists at Indiana University's Kelley School of Business said they were "guardedly optimistic" about their economic forecast. Despite a credit crunch and strains on housing markets nationwide, the U.S. economy is expected to grow at or just below the 3 percent increase that the IU faculty members expected.

This year, they say they are being "cautiously optimistic." The Kelley School's Business Outlook Panel today (Nov. 1) presented a forecast for 2008 predicting national output (Gross Domestic Product) of about 2.5 percent. Indiana's GDP will rise about 2 percent next year. Inflation, as measured by the Consumer Price Index, will slow to about 2.6 percent.

"During the past year, the U.S. economy has essentially been in survival mode," said Bill Witte, associate professor of economics and co-director of the Center for Econometric Model Research at IU. "The good news as the year draws to a close is that we seem to have avoided intensive care. The not-so-good news is that the impediments to full recovery are not diminishing. Nevertheless, we expect the economy will avoid a crisis and continue to muddle through."

The panel presented its forecast this morning at the Westin Indianapolis Hotel. It also will present national, state and local economic forecasts in 10 other cities across the state through Nov. 16. A more detailed report on the outlook for 2008 will be published in the winter issue of the Indiana Business Review, available in December on the Web at

The starting point for the forecast is the Econometric Model of the United States, developed by the Center for Econometric Model Research, which analyzes a variety of statistics to develop a national forecast for the coming year. The center's Econometric Model of Indiana provides similar insights into where the state's economy is headed.

Witte said the two "basic pathogens" for the nation's feeble economic performance are obvious -- the continuing collapse in the housing sector and continuing increases in energy prices. A year ago, oil prices were around $60 per barrel. Yesterday (Oct. 31), oil prices surged to a new record of $94 a barrel.

"In the face of these afflictions, it is a little surprising that the economy has held up as well as it has," Witte said.

Bolstering the U.S. economy has been the influence of stronger international trade that was not driven by a weakened U.S. dollar. Business investment in infrastructure and high-tech equipment and consumer spending also have helped.

"As 2007 draws to an end, we think that 2008 will be another year in successful survival mode," Witte concluded. "The crucial household sector will face pressures from several directions, but will not collapse. While there are definitely risks, there are enough positives to sustain moderate economic growth."

Jerry Conover, director of the Indiana Business Research Center at the Kelley School, said the outlook for Indiana's economy continues to present a mixed picture.

"While income growth in the state continues to lag behind the nation and employment growth will be modest, some sectors will show refreshing strength, and new jobs will outpace lost ones in many parts of the state," Conover said.

Here are some other highlights of the forecast:

  • The nation will add about 1.1 million jobs next year, which is less than in 2007. The U.S. unemployment rate will rise somewhat near the start of the year and then hold fairly steady at around 4.9 percent.
  • Employment in the Indiana economy will increase by about 15,000 jobs next year, continuing growth at a rate below the national average. The state's unemployment rate should hold relatively flat.
  • Manufacturing jobs in Indiana generally will hold their own in 2008, due in part to plant expansions and other new jobs coming online, including those at the new Honda plant in Greensburg. Moderate growth is predicted for Indiana's construction, health care and leisure and hospitality sectors.
  • Indiana's total personal income will grow about 4 percent in 2008, again more slowly than the nation.
  • The government budget deficit, which improved significantly during 2007, will be relatively stable in 2008.
  • The Federal Reserve will lower the federal funds rate to around 4.25 percent by the end of 2008. The prime rate will drop in step with the federal funds rate.
  • Mortgage rates for new loans may decline with the overall drop in interest rates. However, upward adjustments to existing ARMs may cause average mortgage rates to increase.
  • Energy prices may moderate somewhat next year compared to recent levels, but they are likely to fluctuate significantly in response to geopolitical instability, adverse weather and other factors. On average, they will be higher than in 2007.
  • Under pressure from rising costs for labor, especially health care and fringe benefits, 2008 corporate profits will grow by 6 percent to 8 percent, a smaller rise than this year.

Major risks to the forecast continue to be uncertainty about the extent of the continuing decline in the housing market and corresponding problems in the credit sector, higher energy prices than expected and potentially destabilizing effects of the federal budget and trade deficits.

Philip Powell, clinical associate professor of business economics and public policy and chair of the Evening MBA Program at the Kelley School, addressed the outlook for the Indianapolis metropolitan area.

"The Indianapolis economy will inch forward in a lackluster way in 2008," Powell said. "A weak dollar will help local manufacturers export more products. The housing market will bottom out and begin to grow in tiny spurts. A low local cost-of-living will help attract outside businesses."

Powell said real growth in the Indianapolis economy will be between 1percent and 1.5 percent. Local employment will reverse its downward trajectory and grow between 1.5 percent and 2 percent.

"Previously established momentum in Indianapolis income growth faded between 2006 and 2007, and the city has returned to its former status as a lagging economic performer," Powell added, noting that the city lacks the critical mass of high-income industry required to make it competitive with other metropolitan areas.

Today's two presentations are the first in a statewide tour that will continue through Nov. 17. A complete schedule is available online at