Indiana's outlook for 2018.

• Author: Brewer, Ryan M.
• Position: Statistical data

Groundhog Day

In the 1993 movie Groundhog Day, the character known as Phil Connors (played by Bill Murray) is stuck in a time loop, which proceeds to repeat the events of February 2 every day, over and over.

As Connors continues to repeat February 2, he struggles to find meaning deriving from the normal utilitarian activities we economists like to measure in terms of monetary value. Such has been the feeling of our economic recovery here in Indiana. In each period of this decade, we have continued to slog along seeing tepid growth and modest gains, as if we Hoosiers have been cast as stars in another movie about Groundhog Day, this one teasing viewers about the frustrations of seemingly endless subpar economic growth. Now well into its ninth year, our recovery from the Great Recession continues to replay each year with economic news much like that of the last year--slow, and generally unimpressive, as recoveries go. The question remains, will Indiana break out of the slow growth cycle?

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 (another economic Groundhog Day) 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. Second place goes to Texas at 28.5 percent, again with energy leading the way alongside technology. In third place, Oklahoma came in at 21.9 percent, far surpassing the national average of 14.1 percent--a number heavily skewed by the behemoths of Texas and California, which sustained 20.3 percent growth on the backs of technology and many other industries located there.

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).

In terms of GDP (or GSP) growth, econometric forecasting for 2017 indicates Indiana will finish the year with 2.8 percent growth, while the U.S. is expected to see 2.2 percent. That same model suggests Indiana will see 2.8 percent growth in 2018, slightly ahead of growth expectations in the U.S. However, September numbers from the Midwest Economy Index suggest growth in Indiana slowed overall, with consumer spending, mining and construction activity all decreasing, while manufacturing activity ticked up slightly. (1) In the sections that follow, we will address some of the information used to arrive at our final forecast leading into 2018.

GDP growth

The year 2016 ended up as economically uninteresting as it was politically interesting. That year, Indiana and the U.S. both achieved lukewarm growth results of 1.5 percent. Coincident with a national political focus on deregulation, (2) economic outputs nationwide and in Indiana have improved in 2017. Led by a banner year in automotive sales and other manufacturing output, Indiana's economy is poised to outpace the U.S. economy in 2017 for just the second time in seven years. Figure 1 shows the relationship between annual Indiana GSP growth and the U.S. yearly growth in GDP since 1998. We expect Indiana's annual rate of real (i.e., inflation-adjusted) GSP growth in 2017 to be 2.8 percent.

Background on GDP (GSP)

GDP/GSP can be measured using any one of three approaches: the sum of expenditures, the income approach or the value-added approach. (3) In the valueadded approach, upon which we rely for this analysis, intermediate input costs are taken from total sales. In this approach, all sales and costs can be attributed to government activity or private sector activity and can be separated into distinct industries.

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. (4) 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. (5)

In fact, Indiana ranks first in the nation in this way at 91.0 percent of GSP attributable to the private...