A “tepid” economic recovery is expected to continue well into 2014.
“For at least the past year, the economy should have been able to achieve growth close to, perhaps above, its long-run potential of 2.5 to 3.0 percent. Yet growth remains stuck in a sub 2 percent rut,” said Bill Witte, associate professor emeritus of economics at IU and a member of the panel.
“We can find only one plausible explanation: Policy from Washington is standing in the way all across the board. Fiscal policy is obviously a mess,” Witte added. “The latest episode managed to kick that mess into next year, but only after shutting down much of the government for two weeks. On the regulatory front, the rule seems to be if it succeeds, regulate it or sue it.”
Another shutdown looms
Threat of another partial government shutdown in January looms large, as congressional leaders again work toward negotiating a deficit reduction deal and a budget framework. A year ago, similar concerns were felt over the so-called “fiscal cliff.”
“The Federal Reserve continues a totally unsustainable policy stance, with no real plan for how or when it will change course. All of this has created great uncertainty for consumers and greater uncertainty for businesses,” Witte said. “Even with an improved financial situation, households remain reluctant to spend. Meanwhile, businesses sit on piles of cash, borrowing is cheap, yet investment spending is extremely disappointing.”
Through the first six months of 2013, the national economy has grown at an annual rate of just 1.7 percent, far short of everyone’s expectations. Looking forward, the IU panel said it expects the first half of 2014 to be generally similar to this year, with “unacceptably slow growth” of about 2 percent.
Three percent growth possible
Should there be progress with the policy deadlock in Washington and if the Federal Reserve manages to “taper” down its purchases of securities without producing a serious disruption in financial markets, the economists said the national rate of economic growth could rise toward 3 percent by the end of 2014.
In Indiana, the forecast for 2014 is only slightly better, in large part because 2013 has been a “below sub-par” year in the Hoosier state.
“Next year, Indiana output growth is expected to double and eclipse the nation’s rate. That said, it is forecast that neither Indiana nor the U.S. will return to long-run growth trends. Rather, more sub-par growth is expected,” said Jerry Conover, director of the Indiana Business Research Center in the Kelley School.
While the state by 2012 regained about half of the jobs lost during the Great Recession (57,000 in 2011 and 56,000 in 2012), this year only about 37,000 jobs will be added. Next year, an additional 55,000 new jobs will be created in the Hoosier state, Conover said.
Since the beginning of the recession, Hoosiers’ personal income has achieved something it was unable to do for years: keeping pace with the nation. Better yet, it’s been catching up. Indiana personal earnings have risen more rapidly than the national average, led by earnings from durable goods manufacturing, transportation and warehousing and farming.
Overall, the international economy will be stronger in 2014, with global GDP expected to increase by 3.6 percent. However, European Union countries — which consume about a third of the world’s trade goods — will continue to face problems. A slowdown in China and other Asian countries could resume, and Middle East tensions remain high.
The starting point for the forecast is an econometric model of the United States, developed by IU’s Center for Econometric Model Research, which analyzes numerous statistics to develop a national forecast for the coming year. A similar econometric model of Indiana provides a corresponding forecast for the state economy based on the national forecast plus data specific to Indiana. The Business Outlook Panel then adjusts the forecast to reflect additional insights it has on the economic situation.
A detailed report on the outlook for 2013 will be published in the winter issue of the Indiana Business Review, available online in December. In addition to predictions about the nation, state and Indianapolis, it also will include forecasts for other Indiana cities and key economic sectors.
With the notable exception of the residential construction market, the Indianapolis metropolitan area will continue a similar five-year recovery, said Kyle Anderson, clinical assistant professor of business economics in the Kelley School of Business at Indianapolis.
“The good news is that unemployment has fallen to 6.9 percent, the lowest mark since 2008. But it is only modestly lower than where it stood a year ago, and the local economy has only added about 16,000 jobs in the last year,” Anderson said. “To get unemployment to a manageable 4 percent level, Indianapolis will need to add 43,000 jobs. Given the current pace, it looks like we will be in recovery mode for at least a couple more years.”
Incomes and output will likely rise 2 percent next year. The Central Indiana economy will add between 15,000 and 20,000 jobs, which will reduce the unemployment rate to about 6.5 percent.
Housing strength to continue
Other highlights from the IU forecast:
Inflation will remain contained and close to its present level of 2 percent.
The housing sector has been in recovery since the end of 2011, with very rapid growth over the past year. In 2014, housing will remain the strongest industry in the economy, but its period of double-digit growth will end.
In the absence of major supply or security disruptions, energy prices will be relatively flat, with oil averaging around $100 per barrel in 2014. Domestic energy production will be another bright spot in the economy.
The Federal Reserve has held short-term interest rates at virtually zero for nearly five years and has said it will maintain this policy through mid-2015. It is expected to reduce its purchases of securities, which it has been doing at a monthly rate of $85 billion. This may lead to some “disorder in financial markets, but with little impact on the rest of the economy.”
Unemployment in Indiana in 2013 is expected to average 8.1 percent. Unemployment rates for 2014 and 2015 are forecast to fall about a percentage point each year, closing at an annual average of 6.8 and 6.0 respectively. The rate won’t reach the level of “full employment,” or 5.5 percent, until 2016.
Stock market values should climb slowly next year. Earnings forecasts and low interest rates are encouraging for stock prices, but uncertainty about fiscal and monetary policy, along with economic uncertainty in foreign economies, will hamper growth.