Indiana's outlook for 2020.

• Author: Brewer, Ryan M.

Outlook

Amid mixed leading signals and a turbulent news cycle, we expect Indiana's economic output to grow at a rate of about 1.25 percent in 2020.

Sustained growth is expected, largely due to continued strong consumer spending countervailed by weakness in manufacturing. Business investments have not met expectations from the 2018 tax cuts, and corporations have been conducting stock buybacks rather than capital purchases. As the trade war with China continues and the global expansion is slowing down, the Institute for Supply Management (ISM) reports that manufacturers have confirmed a point of contraction--with three consecutive reports each below 50. This is unseen since the beginning of the Great Recession. The September 2019 report (1) came in at 47.8 while October remained below 50 with a reading of 48.3. (2)

Automobile and light truck sales in the U.S. are expected to drop from 16.8 million units in 2019 to 16.4 million units in 2020, a decline of about 2 percent. (3) Indiana will experience a more significant decline than the U.S. as a whole, since Indiana is a heavy manufacturing state with its supply chain entrenched solidly within the automotive sector.

Consumer spending strengthened in recent years due to wage increases across the country, particularly in Indiana, which could result in inflationary pressure. However, the latest information suggests continued wage growth may stall. (4) The Federal Reserve has been dovish of late, with cuts to the federal funds rate of 75 basis points thus far in 2019. These cuts should help keep lease rates and other financing options in check, reinforcing demand for automobile and light truck purchases.

Indiana is expected to experience slower job growth and gross output due to a tight labor market. In September 2019, the unemployment rate in Indiana was at 3.2, lower than the U.S. rate of 3.5 percent. (5) Furthermore, Indiana's labor force participation rate (64.5 percent) is higher than the U.S. (63.2 percent). With fewer and fewer people available to hire, the tightness of the Indiana labor markets will serve as a drag on output and employment growth.

GDP growth and employment

Figure 1 shows the relationship between real annual Indiana gross state product (GSP) and U.S. gross domestic product (GDP) growth from 2008 to 2018, with projections for 2019 and 2020. Based on a conservative forecast, the inflation-adjusted U.S. GDP growth in 2019 would finish at 2.3 percent, a 0.6 percent decline from 2018. (6) We calculate the most recent annualized quarter-over-quarter real growth rate for the U.S. to be 3.2 percent and 1.3 percent for Indiana. The most current data available (through the first quarter of 2019) indicate U.S. output growth has been higher than Indiana's growth rate for four consecutive quarters. (7)

Two factors could be causing slow growth in Indiana: a reliance on manufacturing, which is said to be in contraction, and tight labor markets. Each of these reasons is explored below.

Indiana industries

The majority of Indiana's private sector runs on manufacturing (with output of 28 percent--17 percent durable and 11 percent nondurable), followed by financial services (15 percent), professional and business services (9 percent), and health care (8.5 percent). The government sector also produces about 8 percent of output. (8)

Over the past year, various media have reported conflicting information about the extent of impacts from tariffs on imports and exports in America. Thus, any attempt to accurately quantify the impact of the current trade war on the Indiana economy at this point, would be impossible. With...