IU economists hope nation and Indiana can escape 2009 with only a moderate recession
As 2008 draws to an end, economists at Indiana University and its Kelley School of Business hope that the nation and Indiana can escape 2009 with only a moderate recession -- similar in severity to those in 1990 and in 2001.
"But we cannot rule out something worse -- comparable to the severe recession in the early 1980s," said Bill Witte, associate professor of economics and co-director of the Center for Econometric Model Research at IU.
The Kelley School's Business Outlook Panel on Nov. 6 presented a forecast for 2009 predicting that national output (Gross Domestic Product) will decline through the first half of 2009 -- dropping more than 1 percent during the recession -- before growing in the second half.
Because many Indiana firms depend on economic activity elsewhere -- including the consumer and auto sectors -- the outlook for the state calls for limited growth in GDP.
Employment will decline by nearly 2 million nationally from the beginning of 2008 through the end of the recession. This will drive the unemployment rate up to 7.4 percent and perhaps higher.
The panel presented its forecast last week 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. 18. A 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 www.ibrc.indiana.edu/ibr.
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 current economic conditions are part of a long-term trend. Output growth in the U.S. decelerated for the fifth straight year during 2008. Similarly, the national labor market has been adding fewer new jobs since 2005 and this year has been losing an average of 84,000 jobs per month, with the rate of loss increasing as the year has progressed.
Witte outlined three fundamental problems, now well-known to consumers, that have contributed to the dismal performance of the U.S. economy -- the implosion in the housing sector, the rapid rise in energy markets and "a seemingly endless series of body blows" to financial markets. Each has contributed to weakened consumer and business confidence.
"With consumers and businesses cautious about their spending, there are only two potential sources of forward momentum -- government and the foreign sector. The former is constrained by budget deficits, while the latter is feeling the impact of the financial crisis right along with us," he said. "In the face of all this, it is not surprising that the economy shifted into reverse gear in the third quarter. Unfortunately, we think the worst is still ahead."
In the forecast, inflation declines from elevated levels during 2008, with an assist from much lower energy prices. Weak demand will also cause price increases to moderate.
"Indiana is not immune from the forces shaping the national and global economies, and its outlook for the year ahead is similarly cloudy," said Jerry Conover, director of the Indiana Business Research Center at the Kelley School.
Conover noted that Indiana's manufacturing output has decreased over the past three years, but manufacturing's share of Indiana GDP, 28 percent, is still the largest of any sector. Indiana sectors whose output has grown in recent years include retail, transportation and warehousing, arts and entertainment, health care, technical services and administrative and support services.
Indiana exports reached a record $26 billion in 2007 -- up 14 percent from the previous year -- led by vehicles and parts, industrial machinery, electronics and pharmaceuticals.
"Key factors driving this growth have been booming economies overseas and a weak dollar," Conover said. "The dollar's recent strength and slower economic growth abroad lead us to predict slower export growth in 2009. This will contribute to weak GDP growth for Indiana."
Indiana has seen five consecutive months of job losses -- the first such streak since employment bottomed out in summer 2003 -- but the current forecast does not suggest a bleak outlook. While manufacturing and construction have seen notable shrinkage in employment, other large sectors, including education and health services, government and leisure and hospitality have seen significant employment growth.
"Indiana has maintained a strong pace in announcements of business attraction and expansion, which helps us perform better on employment measures than other Midwestern states," Conover said. "However, some of these firms rein in their growth plans until the overall economy shows more strength and credit loosens up. Although Indiana's unemployment rate has been higher than usual in recent months, it's still close to its average over most of this decade."
The Indiana jobs outlook calls for shrinkage through most of 2009, turning back up late in the year, with year-end employment down about 10,000 to 15,000 jobs. Average unemployment for the year is expected to remain in the 6-7 percent range.
Outlook for Indianapolis
Philip T. Powell, associate clinical professor of business economics and faculty chair of the Evening MBA Program at Kelley-Indianapolis, was less optimistic about the Indianapolis metropolitan area's forecast.
"The Indianapolis economy entered recession during the first quarter of 2008," Powell said. "The Indianapolis economy will shrink between 0.5 percent and 1.0 percent in real terms during 2009.
"A stronger dollar will reverse growth in manufacturing and leave the local economy more vulnerable to recessionary forces," he added. "Logistics and health care will remain relatively strong and provide some sources of growth. The local unemployment rate will increase throughout the year to between 6.0 percent and 6.5 percent and will not peak until 2010."
A complete schedule of panel presentations is available online at http://newsinfo.iu.edu/news/page/normal/9093.html.