IU's Business Outlook Panel cautiously forecasts growth for 2006
NOV. 3, 2005
EDITORS: An audio recording of the panel's other presentation today (Nov. 3) in Bloomington will be available on the Web at 2:30 p.m. at http://broadcast.iu.edu. We invite you to use this resource and enhance your coverage with a link to this site.
INDIANAPOLIS -- Economists in Indiana University's Kelley School of Business today (Nov. 3) presented a guardedly optimistic forecast for 2006, predicting that broad financial impact of Gulf Coast hurricanes will be brief, leading to national output growth of 3.6 percent next year.
Before hurricanes Katrina and Rita, the U.S. economy was headed toward a very satisfactory conclusion. Growth in the first half of 2005 was at a 3.6 percent rate and appeared to be accelerating. The Kelley School forecast suggests that despite the hurricanes' devastation, national economic growth and inflation will return to pre-Katrina levels.
"Basically, our outlook is that the direct damage to the economy from the storms, as well as the indirect damage due to elevated energy prices, will mostly be offset by the stimulative efforts of the rebuilding effort," said Willard Witte, director of the Indiana Center for Econometric Model Research and a professor of economics. "We expect 2006 to be a reasonably good year. We think the economy will continue to expand next year, probably close to its performance during 2005."
However, given recent events, the Kelley School panel is less certain about this year's forecast than in previous years. "Our relatively sanguine outlook could be knocked off course by potential shocks coming from many directions," Witte said.
In Indiana, slow economic growth will continue with a projected increase of at least 25,000 jobs in 2006. Manufacturing jobs are expected only to hold their own. Indiana sectors poised for stronger growth include education and health services, trade, transportation and construction. Professional and business services jobs should continue growing too, but a slower pace than in 2005. The prospects for these sectors in the upcoming year continue to look good, said Jerry Conover, director of the Indiana Business Research Center.
Other highlights of the 2006 forecast, which was presented at the Westin Hotel, include:
-- Inflation, as measured by the Consumer Price Index, will average about 3 percent.
-- The nation will add close to 2 million jobs, and unemployment will fall back to just below 5 percent. Before Katrina, U.S. employment was averaging 190,000 new jobs each month, projecting about 2.3 million new jobs for 2005.
-- The Federal Reserve Bank, which announced on Tuesday an increase to bring the federal funds rate to 4 percent, likely will raise that rate further to at least 4.5 percent. The prime rate will rise to 7.5 percent and mortgage rates to near 7 percent.
-- The national housing market should remain strong, in part due to rebuilding in Louisiana and Mississippi, unless interest rates rise more than expected.
-- Corporate profit growth will slow to about 6 to 8 percent due to increased costs of health care, pensions, energy and other inputs.
Major risks to the forecast, which also will be presented today in Bloomington, include uncertainty about energy prices, the possibility of problems in the housing sector, and potentially destabilizing deterioration in the government deficit and trade balance.
The outlook assumes that energy prices will remain high, but not escalate further from levels reached after Katrina -- crude oil prices at $65 per barrel, gas prices at $3 per gallon and natural gas at about $13 per million BTU. In recent days, gas prices nationally have gone below $2.50 and in some places in Indiana, below $2.25.
"These levels will clearly put pressure on the economy and especially on energy-intensive sectors, such as airlines," Witte said, "but we think such pressure will prove bearable. However, if energy prices were to rise beyond our assumed levels, the resilience of the economy would be severely tested."
Another danger related to a greater rise in energy prices is that inflation expectations could move higher, he said, which also would lead to increased Fed interest rates.
The Business Outlook panelists agreed that the prospect of continued high deficits poses a serious threat to the long-term sustainability of the nation's economic growth.
Today's two presentations are the first in a statewide tour that will include seven other cities through Nov. 18. The starting point for the forecast is the Econometric Model of the United States, developed by IU faculty, which combines a variety of statistics to develop a national forecast for the coming year. Regular panel presenters are joined in each city by an economist from the area who presents a forecast for the local region. The panel has presented an annual forecast since 1972.
Other panelists at today's Indianapolis presentation were Robert Neal, associate professor of finance, and Phillip Powell, clinical associate professor of business economics and public policy.
The panel also will appear in Columbus on Friday (Nov. 4); Richmond on Monday (Nov. 7); Anderson on Tuesday (Nov. 8); Kokomo on Wednesday (Nov. 9); South Bend, Nov. 10; New Albany, Nov. 17 and Schererville, Nov. 18.
A more detailed report on the Business Outlook Panel will be available in late December in the