EYE ON THE PIE: Waiting for evidence of recession

March 10, 2008

Save the date: March 27. That's when the U.S. Bureau of Economic Analysis will release the latest data on Indiana's economy. At that time, we'll get the first estimate of personal income for the last three months of 2007, plus revisions of previous quarters. If there is a recession, that's where we will see the first clear indications.

If? Yes, it is still not clear if there is a recession because the data, our photos of economic performance, are not developed instantly.

Certainly, there are national problems, but are they reaching all the states? In the third quarter of 2007, real personal income in the nation grew 0.96 percent. This quarterly gain of nearly 1 percent was at a seasonally adjusted rate. Each of the states and the District of Columbia were advancing from July to September last year, while everyone was focusing on the mortgage and housing crises. Indiana had a 0.87-percent increase, which qualified for 31st place.

Indiana's long-term quarterly growth rate (1948 to mid-2007) for real personal income has been 0.73 percent (39th in the nation) compared with 0.89 percent for the country. Our volatility (the variation compared to our average growth) was the 16th-highest in the nation. High volatility in itself is not a problem, if the level of income is persistently high.

Over this term of 238 quarters, Indiana has grown in 180 of them (76 percent of the time, tied for 37th place with Oklahoma and Mississippi). The country grew in 86 percent of the quarters. Ohio and Michigan had less positive records than Indiana, while our other neighbors outperformed us.

How many states fall off the growth wagon in a recession? Does Indiana lead the nation on the downside? On the upside? A partial answer to these questions can be derived from the last U.S. recession. Measured by real personal income, that recession began after a personal income peak in the second quarter of 2002. Then, for three consecutive quarters, real U.S. personal income declined before resuming its growth path in the second quarter of 2003.

But there was weakness in the economy earlier. In the seven quarters before that recession, real quarterly personal income growth for the nation was 0.16 percent.

In the first quarter of 2000, 49 states were growing; by the fourth quarter of that year, only 36 were still growing. Half a year later, 25 states were growing. When real personal income peaked in the second quarter of 2002, 30 states were growing. The next quarter, that number was down to 20.

Indiana's experience, however, was not in sync with the nation's. We showed no decline in real personal income during the national recession. Our weakness came in those seven quarters preceding the U.S. recession. While the nation was sluggish at 0.16 percent average quarterly growth, Indiana stagnated at -0.02 percent.

During the three-quarter national recession, when the U.S. average growth rate was -0.13 percent, Indiana grew an average of 0.30 percent. This favorable record was not sustained. Since the last recession, Indiana has averaged a 0.47-percent quarterly growth rate in real personal income, while the nation has achieved a 0.85-percent increase.

What does all this tell us about Indiana and the next (current) recession? Possibly nothing. It may be that Indiana is now so different from the country that cyclical national movements do not correspond tightly with our economic variations. As a state specialized in particular sectors of the manufacturing economy, all we know is that we do not track the nation well. And thus we persistently lag national growth rates.

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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