The coming year promises to be an economic rerun of 2016
The performance of the U.S. economy in 2016 has been anything but stellar. Growth through the third quarter averaged a paltry 1.8 percent, signaling the domestic economy has settled into a period of low GDP growth. A more rapid recovery seems unlikely given the expansion has lasted a full 90 months.
Though job growth has pushed the unemployment rate to 5 percent, at or near full employment, wage gains have been modest. Also, long-term unemployment remains much higher, and alternative measures of labor market performance imply slack in the labor force around much of the nation. In short, 2016 exemplifies the slower growth that has marked the U.S. economy in the years following the Great Recession. The 2017 forecast for the U.S., Indiana and Northwest Indiana calls for much of the same in output and employment.
The Indiana Econometric Model produced at Ball State University predicts the U.S. economy will grow, in inflation adjusted terms, by 2.1 percent in 2017. That is more than the national economy grew in 2016, and effectively identical to the OECD forecast for the year at 2.2 percent.
We also project Indiana's economy will expand by 2.1 percent in 2017, which is very similar to the IHS Global Insight forecast for Indiana of 2.3 percent. Much of this growth will be led by expansion of the transportation and logistics sector, retail, professional services and health care. Lagging sectors across Indiana will include information services, real estate and financial sectors.
We project Indiana economy to add 46,000 jobs in 2017, but expect the unemployment rate to remain very close to its current level of 4.9 percent.
Separate GDP figures for Northwest Indiana are not available, but personal income growth is likely to reach 2.5 percent and the regional unemployment rate will remain between 4.5 and 5.1 percent through 2017. Employment will also grow in Northwest Indiana, but more slowly than the state or nation.
Northwest Indiana has experienced several decades of growth that is slower than expected in the suburbs of Chicago. This is due primarily to the disproportionate representation of manufacturing employment in the region. Manufacturing job growth has been in steady decline for 40 years, and urban locations that are manufacturing dependent have grown much more slowly than more household centric communities.
In more recent years, the relationship of Northwest Indiana to Chicago offers contrasting concerns. Chicago has long been on the cusp of a fiscal catastrophe. The unfunded liability statewide in Illinois is already at a crisis point. The challenges in Chicago are far worse, but due to continuing economic growth in the region, have not yet been on full display. That growth now slows as business investors and households recognize the large tax liability the unfunded obligations now impose on residents. Indeed, the looming fiscal crisis in Chicago will almost certainly prove to be the largest municipal fiscal crisis in U.S. history over the coming decade. Northwest Indiana has benefitted from migration of households and firms from Illinois, but this will prove a trivial benefit against the backdrop of a failed city.
Over the coming year and decade, Northwest Indiana will also experience considerable sectoral adjustment in employment. Over the past generation (18 years), employment in Northwest Indiana has risen only about 1 percent. But, over the same time period, employment in footloose industries (manufacturing, some finance and corporate headquarters) has declined by 22.7 percent, while employment in non-footloose sectors has grown by 7.4 percent.
These stark facts argue against continued investment in efforts to attract firms to the region. Organic, population-based growth will offer an economic future for Northwest Indiana. This forecast reinforces that conclusion.
Finally, no forecast is complete without an assessment of the likely changes to regulatory and tax policy that accompany a new presidency. Mr. Trump has promised widespread regulatory reform, a half trillion-dollar infrastructure plan, a simplification of the income tax system and a reduction in corporate tax rates which are currently the highest in the developed world. All of these potential changes would likely offer significant short term impacts on Gross Domestic Product and employment. Whether Americans are better off from this remains a more difficult question.
Mr. Trump has also promised extensive changes to the terms of foreign trade agreements, including increased tariffs. This would almost certainly make American consumers worse off, while risking significant counteraction that would profoundly impact the Midwestern economy.
The current spike in consumer and business optimism suggests that the tax, infrastructure and regulatory changes appear likely, while the trade restrictions are more hyperbolic. Only time will reveal these clearly.