Kelley School of Business panel 'guardedly optimistic' in 2007 forecast
Nov. 2, 2006
EDITORS: A professionally produced audio recording of the panel's presentation today (Nov. 2) in Bloomington will be available as an audiostream later today at http://broadcast.iu.edu. We invite radio stations to take advantage of this resource and other media to use it in enhancing their coverage with a link to this site.
INDIANAPOLIS -- Economists in Indiana University's Kelley School of Business today (Nov. 2) presented a forecast for 2007 that they characterized as "guardedly optimistic," predicting national output growth (GDP) of about 3 percent next year and slow economic growth in Indiana adding 20,000 to 25,000 new jobs statewide.
Overall, 2006 has been a decent year for the U.S. economy, with GDP growth of 3.3 percent and payroll employment growth of 1.6 million. But growth in both factors has decelerated throughout the year.
Bill Witte, associate professor of economics and co-director of the Center for Econometric Model Research at Indiana University
"This was driven in part by a tightening labor market and in part by a significant jump in energy prices. Elevated inflation caused the Federal Reserve to push short-term interest rates upward by more than we anticipated a year ago," said Bill Witte, associate professor of economics and co-director of the Center for Econometric Model Research at IU. "The situation in the housing sector has deteriorated more than we foresaw.
"Given this somewhat ambiguous state of affairs, we expect an acceptable performance from the economy in 2007, but not up to the standards of the past few years. There are enough risks in the current situation, however, that a weaker outcome is a clear possibility," he added.
The Business Outlook Panel initially presented its forecast this morning at the Westin Indianapolis Hotel and will do so again today at the Bloomington (Ind.) Convention Center, followed by similar events in eight other cities across the state.
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.
Inflation -- as measured by the Consumer Price Index -- will decrease slightly to about 3 percent in 2007. This will be due to a relative stability in energy prices, which recent history has suggested can be tenuous.
"The key to this unfolding drama will be the American consumer," Witte said. "From the end of the recession in 2001 through the end of 2005, consumption spending accounted for 78 percent of the increase in output, with spending on housing construction comprising another 13 percent.
"Consumption has held up pretty well during the past year. Housing, on the other hand, has become severely negative," Witte added. "Part of the decline in residential investment has been made up by business investment and by healthy growth in exports. We expect a continuation of this basic pattern -- consumption at a level that is adequate to maintain forward momentum in spite of continuing declines in the housing sector."
Jerry Conover, director of the Indiana Business Research Center
"In Indiana, the weakening of the housing market will continue, but to a lesser extent," said Jerry Conover, director of the Indiana Business Research Center. Employment in Indiana will grow by 20,000 to 25,000 jobs and at a rate below the national average.
The Indiana employment outlook for 2007 is mixed, Conover said. New construction jobs will come online through high-profile projects such as Major Moves, the new Honda plant in Greensburg, expansion of BP's refinery in Whiting, Ind., and coal gasification plants in southern Indiana. But these plant expansions, which initially drive construction activity, will be offset by manufacturing layoffs at established factories.
Job growth also is expected in Indiana's professional and business services and health and education services sectors.
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. He noted that Indianapolis posted an impressive turnaround last year. Local economic growth of 6.4 percent outpaced a national growth rate of 3.7 percent.
"Anemic employment growth, though, is a cause of concern," Powell said. "Local employment grew only 0.3 percent compared to national job growth of 1.6 percent.
"The Indianapolis economy is generating money but not jobs," he added. "For example, we actually have fewer manufacturing jobs locally than last year, but wages are up. Workers with advanced skills keep their job and get rewarded with a higher paycheck. Those without an education lose their job to China or Mexico."
The Indianapolis economy is expected to perform well in 2007, but skill deficits within the labor force will hamper the city's ability to compete for high paying jobs.
Other highlights of the 2007 forecast include:
- The economists expect the Federal Reserve Bank to hold the federal funds rate at 5.25 percent for most of the year. The prime rate also will remain stable, but mortgage rates may increase slightly.
- Under pressure from rising costs of inputs and health and fringe benefits, corporate profits will grow by 6 percent to 8 percent, a smaller rise than this year.
- While international trade will grow, it will not result in any significant reduction in the large U.S. trade deficit.
- Energy prices will hold fairly steady, with some fluctuations through 2007.
Major risks to the forecast include uncertainty about energy prices, the possibility of problems in the housing sector and potentially destabilizing deterioration in the government deficit and trade balance.
Today's two presentations are the first in a statewide tour that will continue through Nov. 17. A complete schedule is available online at http://newsinfo.iu.edu/news/page/normal/4088.html.
Also at today's Indianapolis presentation was Robert Neal, associate professor of finance.
A more detailed report on the Business Outlook Panel will be available in late December in the