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IU economists see another year of tepid economic growth in U.S.

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Local presentation

The Kelley School of Business economists will make their presentation in Fort Wayne at 11:30 a.m. Wednesday at Ceruiti’s, 6601 Innovation Blvd. The cost is $20. Contact Eric Steenman at 490-1374, Ext. 2864, or send email to Eric.Steenman@lakecitybank.com.

'Fiscal cliff' could tilt country toward recession

Friday, November 2, 2012 - 8:42 am

A panel of Indiana University economists said that they expect slightly better economic growth in the United States next year, if Congress manages to avoid dropping off the "fiscal cliff" that looms Jan. 2.

The Kelley School of Business economists presented their forecast Thursday. Their expectations for growth are modest, and even that forecast is tempered with a heavy dose of pessimism.

"Without congressional compromise -- something we have little experience with recently -- a long list of tax increases and spending reductions will go into effect on Jan. 2," said Bill Witte, associate professor emeritus of economics at IU, in a news release on the forecast. "If 'C-Day' were to materialize, it would almost certainly put the economy back into recession with negative growth for much of next year, decline in employment and rising unemployment."

"In fact, the uncertainty about the situation is already having an impact on business decisions. In the third quarter, investment in plant and equipment actually declined. The tepid pace of hiring probably also reflects this ambiguity," Witte added.

Other ongoing concerns include Europe's lack of progress in dealing with its sovereign debt problems and China's transitioning to a slower growth path.

"We expect that 2013 will be generally similar to 2012: unacceptably slow growth, without much progress in the labor market," Witte said in the release.

The panel expects the national economy overall will expand by about 2.5 percent next year -- if the economy does not go over the fiscal cliff. This will be better than the 1.7 percent so far this year, because of somewhat better household spending, improvements in the housing market and less drag from the government sector, but not enough to make much of a dent in unemployment.

They forecast modest employment growth, with the national economy generating about 2 million new jobs. The unemployment rate will remain above 7 percent.

Inflation will remain close to 2 percent.

In Indiana, the employment story has been somewhat better than expected. Jerry Conover, director of the Indiana Business Research Center, said the state's economic recovery made notable progress in 2012.

"From the peak just before the recession to the trough, Indiana payrolls shrank by 200,000 jobs. Since then, they've grown slowly but steadily by 150,000. So far this year, payroll employment is averaging more than 52,000 above last year's levels, and the growth is accelerating," Conover said. "This growth rate is comparable to the heady days of the late 1990s.

"This is a more appealing picture than we painted last year for Indiana, and for the year ahead our forecast calls for sustained growth -- payroll job growth of more than 50,000 jobs in 2013," he added. "At this rate, we're still about two years away from our pre-recession employment level."

Real personal incomes in Indiana will rise a bit less than 2 percent in 2013, with per capita incomes growing by about $1,500. The state's overall economic output will grow by about 2.3 percent, comparable to the national rate, the economists projected.

Other points the economists made in their forecast:

*The housing sector has finally hit bottom nationally, and the wave of foreclosures is starting to recede. Not only are prices starting to rise, but new housing construction will be a bright spot in the economic picture.

*The Federal Reserve will again continue to maintain its near-zero position on short-term interest rates. Mortgage rates will remain at historic low levels, but lenders will finally begin to loosen the reins on credit.

*In the absence of major supply or security disruptions, energy prices will remain relatively flat in 2013, with oil prices averaging at or below $90 per barrel. Rising domestic energy production will be another bright spot in the economy.

*Stock market values should climb slowly next year, well below long-term growth rates. Earnings forecasts and low interest rates are encouraging for stock prices, but uncertainty about fiscal policy and foreign economies will hamper growth.