Amid an uncertain future, IU Kelley forecast expects U.S. economy restart will continue into 2021

INDIANAPOLIS -- Despite recent historic progress in employment and economic output, the U.S. economy is far from fully recovering gains made before the COVID-19 pandemic. Concerns over anticipated spikes in virus cases this winter contribute to considerable uncertainty.

A new forecast from the Indiana University Kelley School of Business suggests the economy's restart will continue in 2021, but with substantial deceleration from what was achieved earlier this year.

Output could regain its previous peak by the middle of the year, Kelley economists said. But employment is unlikely to get back to its pre-shutdown peak until well into 2022, and unemployment is unlikely to return to its pre-pandemic 3.5 percent low. Consumer spending may recover, but it will be geared toward purchasing goods and not services. Housing construction should continue to expand, but businesses will shy away from investments in new facilities.

Third-quarter output is 3.5 percent lower than that in the fourth quarter of 2019, and nearly equal to the situation at the low point of the 2008-09 Great Recession. Employment remains down by about 10.1 million jobs, compared to just 8.7 million at the low point of the last recession.

Nationally and around the state, the damage to the labor force will be long term. The size of the labor force has declined significantly since the beginning of the shutdown, and much of this decrease may be permanent. Fewer workers will mean lower levels of output and income.

"Indiana is relatively well-positioned to outperform peer states and the U.S. as a whole during the recovery period when we emerge from the COVID-19 pandemic," said Kyle Anderson, clinical assistant professor of business economics and faculty chair of Kelley's Evening MBA Program. "Slack remains in the Hoosier labor force, providing an opportunity for growth as we move into 2021. We will expect to see slow or even negative growth conditions during the last quarter of 2020 and the first quarter of 2021, as we face new waves of infections."

As it did nationally, 2020 began with robust economic expansion in Indiana. But the meteoric hit from the COVID-19 pandemic brought that progress to an abrupt halt, starting in mid-March.

"While the Great Recession unraveled slowly and painfully -- like a severe drought -- causing predictable accumulating damage over a period of several months, the COVID-19 pandemic struck like a tornado -- without warning and with significant power," said Ryan Brewer, associate professor of finance at Indiana University-Purdue University Columbus and co-author of the panel's Indiana forecast.

While this year is ending similarly to how it began -- with the number of COVID-19 cases spiking -- Brewer is confident that our improved understanding of the virus and how to approach treatment may soften the economic impact.

The forecast offers a glimmer of hope of stronger, positive economic growth in the second half of 2021 in Indiana, setting up 2022 for positive economic output. But the baseline for the forecast assumes that Indiana will remain at Stage 5 of the governor's plan to safely reopen or better for 2021.

The Indianapolis metropolitan statistical area, which accounts for 29 percent of the state's population and about a third of state employment and income, is a driver of Indiana's economic activity. Anderson said the region's economy likely will recover much of its losses in economic output and number of jobs next year. Output may return to 2019 levels by the end of 2021. The forecast shows output likely to grow by 3 to 4 percent and employment to increase by 70,000 jobs.

The economic effects of the pandemic have not hit all sectors of the economy equally. In Indianapolis and elsewhere, manufacturing, leisure and hospitality, and health care have been hit the hardest. A key concern is the effect this will have on tax revenues.

"A significant worsening of the pandemic, which seems more likely to occur in the first quarter of 2021, will likely lead to a weaker economic situation than is outlined in our forecast," Anderson said. "Economic stimulus is badly needed to protect businesses and households until the worst effects of the pandemic are dealt with.

"We are modeling a most likely outcome that there will be a modest stimulus package that will have beneficial effects in 2021's first quarter. … The absence of any stimulus will likely lead to a slower recovery."

Other key points from the forecast:

  • Short-term and longer-term interest rates will remain low in 2021 and well below historical averages.
  • Corporate earnings among companies in the S&P 500 index are expected to rebound strongly from 2020 levels.
  • The world economy is expected to shrink by 4.4 percent in 2020 before expanding by 5.2 percent next year. But any resurgence of COVID-19 infections and tightened government restrictions can threaten to drag the world into a global recession.
  • China will be the only major economy with positive growth in 2020. The Kelley panel forecasted that the Chinese economy will expand by 2 percent by the end of the year, thanks to a robust recovery that hasn't been hampered by a strong resurgence of the virus. It is projected that growth will further strengthen in 2021 a rate above 8 percent.

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.

A detailed report on the outlook for 2021 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.

The Kelley School presented its forecast today through an online presentation. Since 1972, Kelley School faculty have presented their annual Business Outlook forecast around the state, usually joined by a local panelist. While they won't be physically traveling across the state, the school and its Indiana Business Research Center will still host 10 regional events virtually through Nov. 19. All Business Outlook Virtual Tour presentations will be open to the public, but registration is required.

Contact

George Vlahakis

Kelley School of Business

Phone: 812-855-0846

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Email: vlahakis@iu.edu

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