Recovery still has a rough road ahead in 2013.
by Michael J. Hicks
As we turn the corner on a New Year we look forward to a hint of what type of economic conditions will prevail over the state and nation. This also is the time of year we at Ball State release the annual results of the Indiana Econometric Model, which predicts economic activity through the new year.
To begin, it is clear that the economy faces steep and continuing difficulty in its path to recovery. Employment as a share of total population has been static or declining throughout 2012. With unemployment rates continuing to hover around 8 percent, there is mounting evidence that structural unemployment (a skills mismatch) plays a larger role in soft labor markets than previously believed.
Moreover, Europe remains in recession, with unemployment rates at 50-year highs, while slow growth in BRIC nations suggest that much of the world shares our economic virus. These difficulties are magnified by the deepest policy uncertainty in decades.
Lack of reasonable insight on such basic factors as tax rates in the coming days can only act to disincentive domestic investment and employment. This is a difficult landscape for the national economy.
For these reasons our models suggest that unemployment rates will remain roughly where they are now throughout the coming year, with any relief in rates coming primarily from a dwindling labor force, not job creation. Real GDP growth will average 2 percent, roughly the rate of productivity growth. Inflation will not be an issue this year, nor will there be significant changes to borrowing costs.
A national recession remains highly likely this year. Though economic models have performed poorly in capturing economic turning points, either the composition of the fiscal cliff or a sustained European recession alone are significant enough to push our economy into recession.
Indiana's economy has outperformed the nation as a whole in GDP growth and employment growth following the recession. However, our model suggests a mixed future.
Through 2013 we expect a decline in personal income in durable goods manufacturing, retail, transportation, information and finance, insurance and real estate sectors. We expect growth in mining and utilities, construction, health care and non-durable goods manufacturing.
Overall we expect personal income growth of 2.4 percent this year, followed by growth of 2.1 percent next year. Unemployment in the state will remain sticky, with an average annual rate of 7.8 percent.
Indiana is a significant exporter of goods to the European Union, with more than 2 percent of GDP destined for Europe. Their recession will reduce demand for these goods and demand for employment in these firms. We also trade with China and India and the slow growth in both counties adds to lower demand for our goods. These factors will weigh both on the state and regional economy in Northwest Indiana.
Over 2013, the region will see economic conditions much like they are now. Unemployment rates in Lake and LaPorte counties will be higher than the state as a whole and may not dip beneath 8 percent until near the end of the year. Porter County will see unemployment rates drop by one half percent over the year.
The structure of the region's economy suggests that rapid recovery through 2013 is unlikely, though fiscal troubles in Chicago may see the relocation of some economic activity from Illinois suburbs to Indiana, a trend that will take some time to fully mature.
Perhaps the only bright spot is the clear turnaround in housing markets that will at least steady the economy through a period of inevitably higher taxes on most households. Overall, economic activity in the region will remain tepid and disappointing through 2013.
Michael J. Hicks is director of the Center for Business and Economic Research and professor of economics at Ball State University. He has held faculty and research positions at the Air Force Institution of Technology, Marshall University and the University of Tennessee, and holds degrees in economics from Virginia Military Institute and the University of Tennessee.
