Strong momentum: Indiana economy on pace to create 50,000 net new jobs this year. The reason? Manufacturing.

• Author: Barkey, Patrick M.
• Position: INDIANA INDICATORS

THERE IS MOSTLY GOOD news on the economy Both in Indiana and in the nation as a whole, the year's second half began with reasonably strong momentum. Buoyed by surprisingly low interest rates, a weak dollar and a strong rebound in business spending nationwide, the state economy has turned in a solid performance in the last six quarters.

Through the first six months of the year, the Indiana economy is on a pace to create about 50,000 net new jobs this year. That's growth of 1.7 percent, just short of the forecast of a 2.0 percent gain in payrolls we made last November.

The reason for Indiana's recent good fortune seems pretty obvious--the manufacturing economy is still running hot. The Federal Reserve reported that output in manufacturing industries nationally rose by a healthy 0.4 percent in June, bouncing back from the weakness displayed in the previous two months. That puts the industrial economy back on the growth trajectory that has boosted output by 10 percent since the spring of 2003.

And it is business spending that is leading the way. Led by double-digit gains in the information-processing equipment and defense and space industries, overall business-equipment suppliers nationally boosted their output at a robust 7.9 percent annual rate in the second quarter of 2005. That far outpaced the fairly anemic 1.5 percent expansion in consumer-goods output over the same period.

Yet this simple explanation for Indiana's good fortune runs up against the stubborn fact that none of our industrial neighbors seem to be on the same page. Illinois and Ohio have registered much slower job growth in the past year and a half, while Michigan continues to be the only state in the nation that is actually losing jobs.

That disparity underscores the danger in relying on simple rules of thumb to predict economic performance. We learned in the recent recession that strong motor-vehicle sales aren't always enough to keep the Indiana economy afloat, just as we are learning today that the relationship between the national economy and energy prices has changed.

Recent trends in employment in the state's 15 metropolitan statistical areas give some hints at what is behind recent growth. Strong growth in hiring by manufacturers in South Bend and Elkhart helped the Indiana economy register a net gain in manufacturing jobs in each of the last four quarters. But much slower growth in recreational-vehicle demand has produced the opposite result in recent months. Strong...