Indiana University

Stronger economic recovery expected in 2015, says IU Kelley School of Business forecast

Gross domestic product will average closer to 3 percent next year

  • Nov. 6, 2014


INDIANAPOLIS -- In their annual forecast presented today, Indiana University Kelley School of Business economists were more optimistic than they have been in recent years, suggesting that 2015 could be the best year of economic recovery since the Great Recession.

"During the past year, the United States economy has given clear signs that it is finally breaking out of the rut it had been stuck in during the first four years of the recovery," said Bill Witte, associate professor emeritus of economics at IU and a member of the panel. "Looking ahead, we expect the coming year to produce a continuation of these positive trends.

"But this favorable outcome is far from a sure bet," Witte added. "The level of uncertainty in the current environment is high."

During the first four years following the recession, from mid-2009 through mid-2013, output growth averaged just 2 percent. The IU forecasts said output growth should average closer to 3 percent in 2015, due especially to a stronger housing sector and more government spending.

Panelists who follow the state and Indianapolis metropolitan area were similarly upbeat.

The panel released its forecast this morning at the Columbia Club in Indianapolis and will present it again at 11:30 a.m. today at Indiana Memorial Union in Bloomington. It also will present national, state and local economic forecasts in eight other cities across the state through Nov. 21.

Over the last five quarters, the gross domestic product has grown at a 2.8 percent annual rate, with four of those quarters well above 3 percent. During the first quarter of 2014, GDP did decline by 2.1 percent, but that was largely attributed to brutal weather conditions.

"Consumption continues to parallel overall growth, with auto sales particularly strong," Witte said, also noting that business investment has grown at a 7.6 percent rate the past two quarters and that shrinkage in the government sector moderated before turning around during the second quarter of this year.

The labor market in 2015 also looks more positive. The forecast said there should be monthly employment increases above 220,000 throughout the year -- continuing solid growth in the last six months -- with the possibility that more than 300,000 jobs could be added during peak months.

The unemployment rate could fall below 5.5 percent by the end of the year.

Outlook for Indiana

In Indiana, the forecast for 2015 is similar, although the rate of growth will be slightly lower, said Timothy Slaper, research director of the Indiana Business Research Center in the Kelley School.

"Indiana's GDP grew more quickly than the U.S. in 2010, about twice as fast as the nation. In the three following years, Indiana's economic output growth rate was a tad behind the U.S., and 2014 is expected to close the year at just a fraction off the national rate," Slaper said. "This trend -- being just a half step behind the national average growth rate -- is forecasted to continue through 2017."

The big news for Indiana in 2015 is that the state is set to return to the same level of peak employment from last decade.

"Regaining the lost ground took longer than it should," Slaper said. "Initial employment gains weren't brilliant; but by 2013, Indiana gained some 52,000 jobs in one year. Indiana hit that 52,000 mark by September of this year and is set to exceed our forecast for the year, with employment in the construction of buildings and transportation equipment manufacturing increasing by double digits."

The IU panel expects Indiana to add 55,000 workers in 2015, and the state's unemployment rate should fall to 5.25 percent by the end of the year.

Indianapolis and Central Indiana in 2015

Economic growth in Central Indiana has been stronger than it has been in years. Kyle Anderson, clinical assistant professor of business economics in the Kelley School of Business at Indianapolis, noted that the local economy will add 40,000 new jobs by the end of 2014.

"Employment growth will have to taper a bit in 2015," Anderson said. The Indianapolis metropolitan statistical area currently has about 45,000 unemployed people. It is not feasible that 40,000 new jobs will be added next year. However, it is likely that the unemployment rate will drop to 4 percent.

"Wages have not grown as fast as employment, with average weekly wages increasing only 1.4 percent in the past year," Anderson added. "However, with unemployment falling and hiring picking up, look for wage pressure to increase in 2015. For the first time in years, employees will have more leverage and employers will need to give wage increases to keep valuable employees."

Other highlights from today's forecast:

  • Inflation will remain contained and close to its present level of 2 percent, due in large part to lower energy prices.
  • While the housing market should be stronger in 2015, it is unrealistic to think that it will return to pre-recession levels.
  • With the Federal Reserve's decision to end quantitative easing, interest rates should begin to rise by the middle of the year, and short-term rates could reach 1 percent by the end of the year. "If the Fed begins to raise interest rates as we expect, there will be the potential for significant instability in the financial sector," Witte warned.
  • Outside the United States, the forecast for the world economy isn't as positive. Much of Europe appears to be heading toward its third recession in a decade. Concerns about security and stability in Eastern Europe and the Middle East will continue and adversely affect economies in the region and beyond. The Chinese economy, which has enjoyed double-digit growth for about 30 years, is clearly decelerating.
  • The Indianapolis real estate market has been a source of growth, but there are signs that the pace may drop off somewhat. Median home prices are up by 13.9 percent over last year and inventories are up by 7.7 percent. While economic growth will continue to spur demand for housing, rising interest rates may dampen some of enthusiasm among homebuyers. Construction projects in downtown and in suburban counties will be an important source of this growth.

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 2015 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.

This year's tour is sponsored by IU's Kelley School of Business, the IU Alumni Association, IU campuses and numerous community organizations. A complete schedule of the Business Outlook Panel tour is available online.

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