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ECONOMIC ANALYSIS: Indiana's economy: The fundamentals are in place

December 31, 2007

Predicting the size and scope of economic activity for the nation, state and region is one of the more important roles played by university economists.

But 2008 is the kind of year that really tests economic forecasting.

The Bureau of Business Research just released its forecasts for Indiana and two regional labor markets. In total, we examined eight different data series and have stressed the performance of net employment and wages.

Our forecast is fairly optimistic. We predict job growth of about 1.6 percent and wage growth of 3.8 percent for 2008. Other forecasters in the state-many with considerable experience in Indiana-have lower projections.

All of the forecasts are worthy of thoughtful consideration and close monitoring by public officials. However, those managing public budgets have little choice but to cleave to the lowest credible projections.

Forecasts involve technical economic theory, large econometric or statistical models, reams of data and a healthy dose of judgment. In the end, all the forecasters will be wrong, but how wrong will we be-and in which direction? Here's why I think Indiana's economy will grow:

The fundamentals for the state's economy are in place: good tax policy, an educated work force and robust public infrastructure. Work must be done to keep us here, but right now we are especially healthy in comparison to our neighboring states. All the gloomy forecasts involve things that may happen.

The subprime mortgage meltdown has not spilled into Indiana. The major signal of a problem-rising interest rates-have not materialized. Few Hoosier banks have dabbled in the subprime markets, and even fewer hold significant at-risk securities. The damage to banks outside the state might be large, but seem unlikely to spill over to the broader economy for two reasons. First, few banks want to go into the real estate business and will refinance loans if they can be given some time. Second, policymakers have stepped in with modest proposals that will make the refinancing easier for borrowers and lenders.

Energy prices have remained high, but that has not prevented consumers and manufacturers from making 2007 a record year. Despite a lower consumer-confidence survey, Black Friday retail sales were 7.2-percent above those of last years', and November's retail sales were a whopping 1.6 percent above 2006's (due in part to a longer holiday season). The price of gas is annoyingly high, but that's the extent of the problem for most consumers.

Finally, the decline in the dollar makes U.S. exports far more attractive, motivates increased domestic consumption and limits imports-all of which will generate short-run increases in U.S. economic activity. This should make 2008 a record tourist and export year.

One thing all of us agree on is the hope we are all wrong and Indiana will grow much faster than we predict.



Hicks is director of the Bureau of Business Research at Ball State University. His column appears weekly. He can be reached at bbr@bsu.edu.
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