Indiana's outlook for 2019.

AuthorBrewer, Ryan M.

The endless expansion

Since the inception of America, which began 242 years ago, no economic expansion has lasted longer than 10 years (120 months, trough to peak, to be exact). (1) The longest U.S. expansion lasted from March 1991 to March 2001 and generated annualized real GDP gains of 3.6 percent throughout the period. (2) In contrast, the current ongoing expansion has now lasted over nine years and has, thus far, generated annualized real GDP growth of only 2.2 percent. (3) In fact, Chandra and Golle (2018) point out that since 1950, economic expansions have been characterized in part by generally longer expansionary periods, as well as generally decreasing GDP growth rates.

Because the U.S. economy has been improving for so long, many economists and finance practitioners are starting to wonder about the end of this business cycle. Some economists have said expansions "do not die of old age."

On this topic, several important questions are raised: Do expansions really not die of old age? If this current expansion does end, when will it do so? Why will it end? Will declines in growth in Indiana come before, concurrent with or after declines in growth in the U.S. economy? Would a recession be more or less severe in Indiana?

For business and personal financial planning purposes, Hoosiers would like to know whether the current economic bliss seen over the last two years will continue. If not, what are steps Hoosier leaders could consider to help reduce the ill effects of a recessionary environment?

Outlook for 2019

We expect Indiana's economic output to grow at a rate of 3.2 percent in 2019, driven in large part by tax cuts, which have spurred business investment. While investments have slowed at last count, the effect of previous investment is expected to drive productivity numbers leading into the coming year, adding to strength provided by consumer spending. The economy appears poised to see its strongest growth in the first quarter of 2019, after which growth rates are expected to slow but remain strong through the end of 2019. Tailwinds include rising wages and consumer spending strength, as well as potential for further capital investment. Headwinds include uncertainties with international trade, political unknowns, labor shortages and the effects of weaning off of inexpensive credit.

For the upcoming calendar year, it is most likely Indiana will continue to experience growth across the board--in jobs, numbers of establishments, income levels (which is buttressed by capital investments), wages and gross state product (GSP). Common to late stages of business cycles, we are seeing stabilizing low unemployment rate numbers, rising wages and rising shortterm interest rates as a measure to control inflation. Recent corporate tax cuts have been yielding improved business confidence and expected continued investments. However, even while businesses will yield productivity gains in coming periods, labor tightness in Indiana is an issue that could countervail, or at least attenuate, gains made by business investment.

GSP: Econometric modeling suggests that U.S. economic growth (as of fourth quarter 2018, on a rolling four-quarter arithmetic average basis) will cool somewhat throughout 2019. (4) Indiana economic growth measured in rolling four quarters of output is expanding right now with the coming year's output expected to peak in the ??rst quarter of 2019, with subsequent rollingfour-quarter growth measurements likely to slow, yielding an expected annual growth in 2019 of 4.5 percent, unadjusted from its baseline forecast indications. By fourth quarter 2019, however, modeling suggests the rollingfour-quarter growth rate will have cooled to 3.5 percent. (5) On an annualized quarterly basis, output is expected to peak in Indiana in the fourth quarter of 2018, with unadjusted annualized quarterly growth expected to measure 4.9 percent (2018 Q4) with subsequent quarterly annualized growth rates measuring 4.8 percent, 4.5 percent, 4.0 percent and 3.5 percent, respectively. (6)

Taxes

The National Federation of Independent Business (NFIB) randomly sampled 20,000 NFIB member businesses across the country between February and April 2018, to investigate the effect of federal tax cuts on small businesses. The survey indicated that 76 percent of small businesses believe the current business climate is headed in a positive direction, and 75 percent of small businesses believe the new tax law will positively impact their businesses. Eighty-seven percent of small business owners believe the tax law will positively impact the economy at large. (7)

The Tax Foundation reported that Indiana collected the 17th most in corporate income tax per capita ($156 per capita) in fiscal year 2016. (8) Neighboring states Michigan ($90 per capita, ranking 34th) and Kentucky ($137 per capita, ranking 21st) appear to be better positioned, while Illinois ($262 per capita, ranking sixth) is less business favorable. (Ohio collects corporate tax at the gross revenue level and was not included in the study.)

Overall, for 2019, Indiana ranks 10th most favorable in the country on the Tax Foundation's State Business Tax Climate Index, which includes corporate tax rates, individual tax rates, sales taxes, property taxes and unemployment insurance taxes. In this more comprehensive and current measure of taxation, Indiana compares favorably to its neighboring states of Ohio, Michigan, Kentucky and Illinois. (9)

Thus, the tax changes look to benefit Indiana relative to many other states from a business perspective, as well as from an employee perspective. These elements could position Indiana in favorable light when Hoosier businesses seek to attract investments and intellectual capital from outside of the state.

To add to the relative tax law change benefits, Indiana also benefits from a comparatively strong position in terms of unfunded pension liabilities. First, the nation continues to age, and baby boomers continue to retire. (10) Second, with federal corporate and personal income tax revenues scheduled to drop due to the Tax Cuts and Jobs Act of 2017, states are likely to feel pressure to cover certain services where federal funds are no longer available. (11) Thus, pressure felt by states to fund ongoing pension obligations will increase as government cash sources are squeezed and services are cut. With respect to pension liabilities, Indiana ranks second in the U.S. (favorably) in that it has the second-least unfunded pension liabilities per capita in the country. As of 2017, Indiana was saddled with only $9,131 per capita--less than half of the U.S. average. Neighboring states of Ohio, Michigan, Kentucky and Illinois all had significantly more pension liabilities in their books (see Table 1). (12)

In sum, the new tax laws appear to benefit Indiana relative to other states going forward, particularly in light of the national issue of an aging population and unfunded pension liabilities. Thus, tax...

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