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IU Kelley School of Business panel presents pessimistic economic forecast for 2016

  • Nov. 5, 2015

FOR IMMEDIATE RELEASE

INDIANAPOLIS -- Disappointment over a struggling national economy this year likely will continue into 2016, as any gains are likely to be modest, according to a forecast presented today from the Indiana University Kelley School of Business.

There had been optimism that the economy could register something more than a “post-recession 2 percent slog,” but negative international conditions and revisions to 2013-14 data from the Bureau of Economic Analysis suggest that was merely an illusion.

“Looking to the year ahead, we see little reason for any real optimism,” said Bill Witte, associate professor emeritus of economics at IU and a member of the panel. “We think the economy can match the past year, or perhaps do a little better.

“For growth to move significantly higher, some sectors will need to improve relative to this year,” Witte added. “The sectors that have been solid, such as consumer spending and housing, could hold their own but realistically have only limited upside. Other sectors, including business investment, international trade and government spending, seem unlikely to fill the void.”

IU Kelley School economists expect real output growth in 2016 will average about 2.5 percent, which will be a little better than this year, but only equal to 2014. It also continues a pattern that has been in place since 2011.

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. 20.

Reasons for the panel’s pessimism include output in the third quarter of an annual rate of just 1.5 percent, which was less than half the rate in the prior three-month period. The national labor market has been growing by an average of 167,000 each month, barely half the rate at the end of 2014.

The slowdown in China’s economy has had an impact on economic growth in other emerging economies, and instability of its currency has severely affected U.S. exports, a bright spot in previous years.

Among the few bright spots have been strong U.S. auto sales and a modest rebound in the housing sector.

Looking ahead to 2016, the panel said the national labor market should match its recent performance, but well below what occurred in early 2014, with jobs growth staying far below 200,000 a month.

“In part, this deceleration will reflect a labor market that is approaching full employment,” Witte said. “This also means that the steady decline in the employment rate, which has been in place since late 2011, will slow. By the end of 2016, the rate will be below 5 percent, but only by a tick or two.”

Outlook for Indiana and Indianapolis

In three of the past four years, Indiana has trailed the nation in gross domestic product growth, but the Hoosier economy is expected to grow at a slightly faster rate into 2017, said Timothy Slaper, research director of the Indiana Business Research Center in the Kelley School.

“While Indiana-specific conditions can affect economic performance, Indiana’s economic growth can also be affected by the demand for Indiana’s goods and services from outside the state,” Slaper said. “Given Indiana’s status as a manufacturing powerhouse, its GDP could be boosted by strong demand for industrial machinery and automobiles.

“One should be mindful that the state’s fortunes don’t rise and fall with the auto sector,” he added. “Thanks in part to pharmaceutical and medical device sales, the state bounced back from the Great Recession relatively strongly in 2010 -- twice the national rebound -- even as auto sales hovered around a mere 11.5 million units.”

The state’s employment picture has exceeded expectations. Over the past year, Indiana’s unemployment rate has gone from 6 percent down to a preliminary estimated rate of 4.5 percent in September.

“It is expected to continue to drop until it is significantly below the ‘go-go’ times of July 2007, when it had dipped to 4.5 percent,” Slaper said.

The economic climate in and around the capital city likely will be a continuation of flat conditions this year, said James Smith, senior lecturer in finance.

Weakening international markets could lead to declining sales and possible cutbacks at major manufacturers in Central Indiana. Rising interest rates and a tight labor supply also could restrain business expansion, especially in the housing, Smith said.

Other highlights from today's forecast:

  • Inflation will remain contained, although it may rise slightly as the impact of lower energy prices fades.
  • While there have been suggestions that the Federal Reserve may raise rates later this year, the panel doesn’t think that will happen until early next year. When it does happen, the direct impact will be minimal.
  • Business investment isn’t expected to increase significantly, and governmental spending will be limited by budgetary constraints.
  • The Federal Reserve is expected to begin the process of raising the federal funds rate in early 2016. The path of these increases, however, will be slower than normal, with rates of less than 1 percent by the end of 2016. 
  • In this environment of low rates, low inflation and 2.5 percent GDP growth, stock market values should show modest performance in 2016. The overall return should be positive, but less than the historical average return of about 10 percent. 
  • Corporate earnings are expected to rebound from disappointing levels in 2015. Global economic growth will be improving, but still weak in 2016.

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 2016 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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Timothy Slaper

Timothy Slaper

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James C. Smith

James C. Smith

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George Vlahakis