Eye on the Pie and Opinion

MARCUS: Hold the celebration; reality is just ahead

June 18, 2011

I will not be a spoilsport. I’ll join my economic colleagues who have been trumpeting the recent news that Indiana’s ranking third in the nation is something good.

During 2010, Indiana was third in percentage growth of gross domestic product, the value of market goods and services produced in the Hoosier state.

The economic community made pleasant noises over this achievement. Third-place GDP growth at 4.6 percent (after adjustment for inflation) is sweet compared with the national figure of 2.6 percent.

However, if the future is like the past, this moment of euphoria will soon turn from crowing to cowering.

Often, as the nation starts recovering from a recession, Indiana is out in front. But Indiana often leads the way in an economic downtown. Frequently, Hoosiers ride as passengers in one of the front cars on the business roller coaster.

In 1998, Indiana’s GDP grew 5.1 percent while the national growth rate was a healthy 4.4 percent. Yet the next year, while the nation advanced to a 4.8-percent rate of growth, Indiana fell to 2.8 percent. In 2000, Indiana again lagged the national rate of increase. Then in 2001, with the nation squeaking out a 1.3-percent growth rate, Indiana showed a decline of 1.7 percent.

Here, the roller coaster starts to ascend once more. It’s 2002, and Indiana grows 2.8 percent and the nation 1.7 percent. The following year the same pattern brings Indiana to the peak of the cycle at 3.7 percent with the nation trailing at 2.1 percent.

But the roller coaster starts to dive, with Indiana growing less rapidly than the nation over five of the next six years, from 2004 to 2009.

Now we are treated to the view from the top once again with a 4.6-percent growth in 2010.

If you are not too dizzy from the ride, consider what lies ahead. We are most likely to see Indiana lagging the nation’s GDP growth in 2011 and through the next recession.

Deeper in the data for 2010 are signs that Indiana is already slipping behind the nation in rate of GDP growth.

While GDP figures for states come out annually, total compensation of employees is a quarterly series and a proxy for GDP. By looking at compensation patterns in 2010, we get an inside view of the trend in GDP during that year and as we went into 2011.

As less labor is needed with more sophisticated machinery, compensation as a percent of GDP has declined for at least a decade, but GDP and compensation are still closely linked.

What’s been happening? Indiana’s compensation growth slowed as 2010 progressed. In addition, the compensation growth rates for Indiana and the United States are diverging in favor of the nation.

This analysis goes deeper into the data than the happy talk that gets onto radio and TV. It does not foretell particularly happy times for Indiana in 2011.•

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Marcus taught economics for more than 30 years at Indiana University and is the former director of IU’s Business Research Center. His column appears weekly. He can be reached at mmarcus@ibj.com.

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