IU's Business Outlook Panel forecasts national economic expansion in 2004
EDITORS: The panel's other presentation today (Nov. 6) at noon in Bloomington will be presented live on the Web, and a recording of it will be available online by 3 p.m. This professional-quality audio will be available live at http://broadcast.iu.edu. We invite news organizations to utilize this resource and enhance your coverage with links to this site. A complete schedule of the panel's tour stops across the state can be found at http://newsinfo.iu.edu/news/page/normal/1154.html.
INDIANAPOLIS -- Despite reports to the contrary, there have been clear signs of a sustained economic recovery in the United States, which is expected to continue through 2004, according to a forecast presented today (Nov. 6) by economists in Indiana University's Kelley School of Business.
While IU economists don't expect to see numbers matching the 7.2 percent growth registered in the third quarter of 2003, they do expect output growth next year to approach 4 percent.
They also believe that this growth will be more broadly based than during the past two years, when household spending on consumption and housing was keeping the economy afloat. In 2004, household spending will be joined by significant increases in business investment in new plants and equipment, and probably also in some inventory rebuilding.
Overall output growth for all of 2003 will probably be about 3 percent, because growth has accelerated in the second half of this year. At the same time, inflation has remained close to 2 percent, and interest rates dropped at mid-year to levels not seen in more than four decades.
"Next year should be the best year for gross domestic product growth since 1999," said R. Jeffery Green, co-director of the Indiana Center for Econometric Model Research and professor of business economics and public policy. "The recent upturn in plant and equipment spending is very bullish for the economy."
Green expressed concerns about a "ballooning" federal budget deficit. "A federal deficit is fine to stimulate the economy during a recession, but with the economy now in a sustained expansion, the deficit should decline, and it is not," he said. "Steps need to be taken to bring it under control."
The employment picture is mixed. While establishment employment has declined by over 1 million jobs since the end of the recession, household employment numbers indicate a rising number of employed persons. At this point, the economists aren't sure which number is more accurate.
"By most measures the economy has performed quite well, and quite close to the outlook we presented a year ago. Yet the man on the street by most reports believes that things are not going well," observed Willard E. Witte, IU associate professor of economics and co-director of the IU Center for Econometric Model Research.
"Central to this concern is the labor market situation. During the late 1990s, the economy was adding almost 3 million jobs each year. For the past two and a half years, job losses have averaged over a million each year," added Witte, who wrote the national forecast and will present it in Anderson, Fort Wayne, Kokomo and Richmond. "As of September, total employment was nearly 2.7 million below its peak in early 2001. As a result, unemployment has risen steadily to above 6 percent. This is not high by historical standards, but it is far removed from the below 4 percent levels reached prior to the recession."
In Indiana, total employment has fallen by 6 percent from its peak in March 2000 to 2,841,844 in September. The largest portion of the jobs lost since Indiana's employment peak has been in manufacturing, 55.8 percent or 101,246 jobs. The manufacturing sector now accounts for 20 percent of all non-farm jobs in Indiana, down from 22.2 percent in March 2000. Nationwide, manufacturing employment has declined by nearly 16 percent since July 2001.
Other sectors in Indiana that have lost substantial numbers of jobs in the state include professional and business services, which have declined in number by 14 percent since March 2000; and retail trade, which has declined by 12.4 percent over that same period. Both losses reflect the general impact of a sluggish economy, as businesses and consumers cut discretionary spending when money and jobs are scarce.
Jerry Conover, director of the Indiana Business Research Center, forecasts an increase of only about 1 percent, or about 28,000 jobs, in the Indiana labor force. The state's unemployment rate is projected to decline slightly from its current seasonally-adjusted level of 5.3 percent to the long-term average of 4.6 percent by the end of next year.
"As the national economy picks up steam in the year ahead, Indiana should see a modest upturn before the year is out," Conover said. "Indiana entered the most recent recession before the rest of the nation, and it's taking its time climbing out of it."
The national forecast calls for the creation of close to 2 million new jobs in 2004 and unemployment near 5.5 percent by the end of the year.
Although the labor market situation is troubling, IU economists found other reasons for optimism in 2004:
-- International trade should improve. Since the beginning of 1997, the U.S. current account deficit has quintupled to over $500 billion, or more than 5 percent of gross domestic product. This has been due to strong demand by American consumers and businesses for foreign goods, a strong dollar and sluggish demand for U.S. products. The U.S. dollar has been falling in the foreign exchange market since 2002, and many economies in the rest of the world are improving.
"The forecast predicts an economic upswing for essentially all world regions with the significant exception of Japan," said Andreas Hauskrecht, assistant professor of business economics and public policy. "The world depends notably on the United States as the economic powerhouse that helps other regions to pull out of economic struggle. The economic growth path in the United States is expected to be robust, while recovery in Europe is further delayed and more modest than originally hoped."
-- The jobless recovery has not deterred people from buying homes over the past year, and this is expected to continue in 2004. Housing starts will continue at about the same level of 1.7 to 1.8 million nationwide. While a rise in interest rates will act to dampen housing starts, the continued economic recovery should offset this.
-- Mortgage interest rates bottomed out at about 5.25 percent in early summer and since that time have increased to about 6 percent. Mortgage rates will rise over the next year to 6.5 percent. The prime rate is expected to be near 5 percent by the end of the year.
-- Corporate profits are expected to rise by about 9 percent next year as the economy continues to grow and recover from the recession.
A major risk to today's forecast continues to come from uncertainties abroad, particularly in Iraq. However, the economists noted that the U.S. economy has shown "enormous resilience" since the Sept. 11 attacks and that it has had 20 years of expansion since 1982.
The same forecast was presented today in Bloomington. The two presentations are the first in a statewide tour that will include eight other cities through Nov. 18. 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 today's Indianapolis presentation were Dan Dalton, dean of the Kelley School; Morton Marcus, former IBRC director; and James Smith, senior lecturer in finance.
The panel also will appear in Columbus on Friday (Nov. 7); Richmond and Anderson, Nov. 11; Kokomo and Fort Wayne, Nov. 12; Schererville, Nov. 14; and New Albany and Evansville, Nov. 18. 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 late December in the