Indiana should surpass the nation in GDP and income growth.
by Michael J. Hicks, Ph.D.
As 2014 wrapped up, economic growth for the first three quarters was 2.3 percent. This is close to the 2 percent growth I predicted a year earlier. Growth in the third quarter showed a marked improvement from the 1.2 percent growth over the first half of the year, which included the dramatic decline in GDP in first quarter. It is a safe bet that the last quarter of 2014 will be better than the first, with U.S. growth in 2014 perhaps creeping toward 2.5 percent for the year. The United States remains in a recovery, but it is slow with few broad signs of accelerating growth.
In 2015, our forecasts see improved conditions with real gross domestic product growth in the United States averaging 2.7 percent through the year. We believe the unemployment rate will continue to decline, ending the year at 5.7 percent, well within the range of full employment. Monthly job creation will range from just over 90,000 per month to more than 120,000 per month throughout the year, accelerating slowly by the end of the year. The number of unemployed will also rise, though at the end of the year as labor force losses stabilize and more workers commence a job search.
The U.S. economy continues to expand, but the rate of growth continues to be beneath that expected in typical recoveries. This recovery is longer than all but four recessions since the 1850s. Time accumulates risk to this recovery. The risks include slowing European and Asian economies, especially a recession in Northern Europe as Russia’s economy sinks into deeper recession and its currency devaluation leads to financial crises in the nation.
Stable and unusually low fuel prices for both natural gas and petroleum offer a counterbalance to the downside risk of Russian military adventurism and broad political instability in the Middle East. Inflation remains a looming but not yet immediate issue. The size of the Fed’s balance sheet, and the near doubling of the U.S. debt over the past decade, limit policy responses to any change in growth or inflation in the coming years.
In Indiana, the economy did well in 2014. These gains will continue through 2015, and we forecast Indiana gross domestic product growth to outstrip the nation by more than a half percentage point through 2015. Likewise, personal income growth in Indiana will outstrip the nation, and we should see the income gap between Indiana and the nation as a whole shrink through 2015.
However, the Great Recession has left parts of the Indiana economy weaker than in the pre-recession period. In particular, the housing market statewide has not recovered. While some areas have seen a price and sale rebound, much of Indiana, like much of the nation, has yet to see a surge in new home construction, which remains stuck at near record low post-World War II levels.
At the industry level, we expect continued above trend growth in manufacturing and logistics, retail, utilities and a rebound in finance insurance and information services. Health care will recover slightly from its 2014 pause, but growth will remain below trend in that area through 2015.
Northwest Indiana will see uneven growth in 2015; first, the bright spots. As labor markets tighten we expect personal income to rise and unemployment rates to decline. In some areas, labor force will rebound as discouraged workers re-enter the economy. Northwest Indiana will see increases in construction as the growth of urban areas continues to lead to increased investment in the region. This is important since this will offer significant job opportunities to low-skilled young workers in the area.
Much of the Northwest Indiana story will be about continued growth in the manufacturing and transportation of goods. It is likely that 2015 will be another record year for Hoosier manufacturing production. Importantly, manufacturing employment is above the trend level, and is likely to continue. Across the region, 2015 will be a year of more jobs, modest wage growth, and improved economic conditions.
Michael J. Hicks, Ph.D., is the George & Frances Ball Distinguished Professor of Economics at Ball State University.