The Indiana Business Review (IBR), a publication of the Indiana Business Research Center at IU’s Kelley School of Business, predicts economic growth for the state in the year ahead. But will it be slow and steady growth or something more robust? And how is Indiana doing relative to other Midwest manufacturing states? Ryan M. Brewer, Ph.D., Associate Professor of Finance, Indiana University Division of Business, Indiana University–Purdue University Columbus, has some thoughts and analysis on those topics and others. Following are excerpts from his article, “Indiana’s Outlook for 2018,” which appears in IBR’s Winter 2017 edition:
On economic performance:
For 2018, we expect to see growth between 2.0 percent and 2.8 percent. Whether we end up near the higher end of the scale or the lower end … depends on several external factors, such as U.S. tax reform, Federal Reserve action, free trade agreements, immigration labor policies, international stability and inflation, as well as other factors more within the control of Hoosier leaders.
Although recent years have produced slow economic growth without much variance, growth experienced during the recovery here in Indiana certainly has not knocked us out of our economic socks. In spite of our slow growth, Indiana’s numbers have generally compared favorably to those of other states. Over the last seven years (2009 to 2016), Indiana’s seven-year growth in chained-dollar, or “real,” gross domestic product (gross state product, or GSP) has ranked 15th in the country at 14.7 percent (2.0 percent annual growth), according to the U.S. Bureau of Economic Analysis. The U.S. leader over the period has been North Dakota, with 46.6 percent real growth achieved over the seven-year period — but it’s difficult to compete with oil shale fields and a new oil pipeline.
Among our 10 peer states who are either heavy manufacturers, neighboring states or both, Michigan comes in first with a seven-year GSP growth of 18.6 percent. Ohio was second at 15.2 percent, and Iowa at 15.1 percent. Indiana was fourth (14.7 percent), followed by Oregon (14.4 percent), Wisconsin (11.5 percent), Kentucky (10.7 percent), North Carolina (10.3 percent), Illinois (8.5 percent) and Louisiana (-2.5 percent).
On the private sector’s contribution to gross state product:
In Indiana, the lion’s share of GSP aggregates from compensation and returns to capital generated by the various industries across the state, each having a unique performance profile, with government in our state taking a small share of total output. In 2015, the private sector of the Hoosier state accounted for 91 percent of economic activity, while the government comprised the other 9 percent. As a comparison, the United States’ private sector measured at 88 percent of total output, with government expenditures coming in at 12 percent, implying government’s share of economic activity for the U.S. as a whole is 33 percent higher than the level of government in Indiana.
In fact, Indiana ranks first in the nation in this way at 91.0 percent of GSP attributable to the private sector. Pennsylvania follows in second place at 90.4 percent private, with Delaware at 90.3 percent, Illinois at 90.2 percent and Minnesota at 90.2 percent. Predictably, the District of Columbia comprises the largest component of government output among all U.S. regions with its private sector coming in lowest of all, at 65.9 percent. The most government-loaded states are New Mexico (77.8 percent private), Hawaii (78.4 percent private), Maryland (79.5 percent private), Alaska (81.4 percent private) and Virginia (81.7 percent private).
Indiana’s private sector runs broadly on manufacturing (31.8 percent), followed by financial services (16.4 percent), professional and business services (9.2 percent), health care (8.8 percent), retail (6.7 percent), wholesale (6.1 percent), construction (4 percent), arts/entertainment/recreation/food services (3.8 percent), transportation and warehousing (3.6 percent), information/media (2.3 percent), utilities (2.0 percent), agriculture (1.3 percent), education (1.0 percent), mining (0.6 percent), and other services (2.4 percent).
On economic headwinds:
Starting with the bad news, agriculture expects to be down 19 percent for 2017, yet also expects to rise by 2.1 percent in 2018. It is worth noting that agriculture was up 20.7 percent in 2016. As mentioned above, agriculture comprises only 1.3 percent of the total economy of Indiana, so the impact of rises and falls in this sector may not be material on the whole. Other sectors expecting to see real negative growth include information (this includes publishing, motion pictures, broadcasting, telecommunications and internet publishing), which expects to see a 0.7 percent decline in 2017 followed by a 0.4 percent decline in 2018, as well as education, which expects to see a 1.0 percent decline in 2017 followed by a 1.6 percent increase in 2018.
A risk for economic growth in Indiana is that durable goods manufacturing is expecting to see headwinds through 2018, as we approach what some feel will be a plateau in North American auto and light truck sales. Buoyed by robust new car and light truck sales increases between 2010 and 2016, the recovery from the Great Recession in Indiana has been supported, with steady increases all decade, leading to nearly 17.6 million auto units sold in 2016, representing the highest number of units sold in history. Forecasts for 2017 and 2018 auto sales in the U.S. are mixed. Forecasts from auto industry experts prior to the recent hurricane season expected to see declines in new car and light truck sales this year and next.
Yet, with a hurricane effect bump arising from the roughly 500,000 cars and trucks that were destroyed by Hurricane Harvey in Texas in summer 2017, this industry expects to gain traction. Annualized September 2017 sales numbers in the U.S. were 18.9 million, yet this is, of course, unsustainable. The temporary sales increase should materialize between September and December 2017, and somewhat during the first part of 2018, as damaged cars are replaced. The record level of sales in the U.S. in 2016 may ultimately be the automotive plateau some have been suggesting, while 2017 numbers are expected to be less, in spite of the hurricane bump. The nearly decade-long auto sales expansion is finally beginning to show some signs of age and higher mileage.
Indiana is generally on track for economic growth in 2018, likely somewhere between 2.0 percent and 2.8 percent … Indiana leaders may want to consider the following concerns:
Dr. Brewer’ full economic analysis, including footnotes, can be found at www.ibrc.indiana.edu.