ECONOMIC ANALYSIS: State economy looks good, but clouds are on horizon

November 21, 2005

It's the time of year to get out our crystal balls and ask this deceptively simple question: What kind of year will 2006 be for the Indiana economy? This year, like any other, finds us making lists of what's going right, and what's going wrong, in our economic environment.

Let's start with the good news. It may surprise some of you to know there is plenty to choose from. Topping the list has to be the surprisingly robust health of the national economy. From the vantage point of November, the coming year is shaping up to be respectable for overall economic growth. We should see growth only slightly down from this year, with a mild increase in inflation and interest rates.

There's plenty to worry about in the national economy, of course. The trade deficit, the low savings rate of American households, and the unwinding of the housing-price spiral are just a few things that come to mind. But overall growth isn't on the list. And while it takes more than growth in the U.S. economy for the Indiana economy to prosper, it's almost impossible for our state to go forward when the rest of the country is not.

The pattern of that growth, at least to this point in time, has been quite friendly to Indiana businesses as well. One of the best-kept secrets has been the quiet resurgence of the industrial economy. In the last two years, output in factories across the country has rebounded from its post-recession low, with growth surpassing the losses sustained in the first three years of the decade.

That growth has helped our manufacturing-based state economy rebound as well. Since the low point of mid-2003, manufacturing employment statewide has stabilized and even managed a bit of growth.

Businesses today have plenty of cash, and their brisk spending on capital goods and equipment have kept plenty of Indiana businesses' order books full. But the extra stimulus to Indiana from the industrial boom nationally is starting to wind down. I expect to see a reduced trajectory of growth for the U.S. manufacturing sector next year, and this tops my list of concerns for the state in the coming year.

For some analysts, the recent weakness in statewide job growth is also a concern. But it's not on my list, at least not yet, and here's why.

For several years running, the preliminary data on employment have done a much more accurate job counting job losses than they have done in tallying jobs created. That is especially so for the services-producing industries, and especially for the Indianapolis metro area.

As a result, when more complete information becomes available and the preliminary estimates are revised, what was once sluggish or negative job growth starts to look much better.

The state employment picture in October thus presents a familiar pattern, with the state's total job count treading water for the last six months, with Indianapolis' employment total down more than 15,000 jobs since early spring. I believe this will be revised upward again, to show 2005 as a year of growth at or above 2004 levels.

My confidence in this belief, however, is being tested by the news coming out of the state's Department of Revenue. After growing at double-digit rates for the first half of this year, growth in individual income tax receipts came to an abrupt halt in the third quarter. October's receipts look more respectable, but this certainly bears close attention.

The bottom line, I believe, is that Indiana's growth will continue in 2006, but won't be as strong as in 2005.

Barkey is an economist and director of economic and policy study at the College of Business, Ball State University. His column appears weekly. He can be reached by e-mail at pbarkey@ibj.com.
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