IU experts predict another lackluster year for economy in 2017

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Indiana University Kelley School of Business economists on Thursday morning offered a downbeat forecast for next year’s national economy. Then they offered an additional warning.

Even a “somber view” of the economy in 2017 could be “wishful thinking,” they said.

"The U.S. economy during 2016 has underperformed, even relative to our diminished expectations a year ago," said Bill Witte, associate professor emeritus of economics at IU and part of the school’s Business Outlook Panel. "Looking to the future, we see little reason for any real optimism, but we do think the economy will continue to muddle through, matching the past year, or perhaps do a little better."

The economists expect output growth nationally next year to average only slightly above 2 percent.

Two years ago, the panel predicted the economy to reach growth of about 3 percent, only to see actual growth of just 1.9 percent for 2015. Last year, they predicted 2016 growth of 2.5 percent. Over the first three quarters of this year, growth has averaged just 1.7 percent.

In reaching their forecast for next year, the panel noted that job creation has slowed, the labor market is nearing full employment. Household spending is in “good shape” and consumption has been “quite strong.”

"At the same time, every other part of the economy is lackluster or worse," Witte said. “This lack of balance is troubling for the present and unsustainable for the future. “

He said the forecast "depends on at least some improvement in investment—both business and housing—and government spending. This will offset a modest deceleration in consumer spending, bringing the latter into better balance with income growth."

The economists expect slightly better news for Indiana and the Indianapolis area than the rest of the nation.

The state should begin to outperform the country due to greater demand for its goods and services, said Timothy Slaper, research director of the Indiana Business Research Center in the Kelley School. Slaper prepared the state's forecast report with Ryan Brewer, assistant professor of finance at Indiana University-Purdue University Columbus

"In terms of gross domestic product growth, 2016 looks to reverse the trend of Indiana underperforming the overall nation,” Slaper said. “We currently forecast that 2016 will close out with real economic growth of 3 percent, compared to between 1.6 and 2 percent nationwide.”

Indiana has trailed the United States in gross domestic product growth in four of the past five years but is expected to grow at a slightly faster rate than the country through 2018, he said.

The state still relies heavily on auto manufacturing but has diversified it employment base “with life sciences and global transportation business, each of which are expected to grow from 2 percent to 6 percent over the coming year," Slaper said.

"Indiana also has a healthy blend of a comparatively low unemployment rate alongside an increasing labor force participation rate," he said.

The strongest activity in Indiana will continue to take place in the Indianapolis-Carmel metropolitan statistical area, said Kyle Anderson, clinical assistant professor of business economics at the Kelley School Indianapolis.

"Overall, the Indianapolis economy continues to be fairly healthy," Anderson said. "The region is at full employment, and continued job growth will ensure that it stays there. Further, low unemployment and continued growth should lead to higher wages for workers. Low interest rates will continue to encourage residential construction."

Differences in unemployment between Indianapolis and the rest of the state can largely be attributed to differences in educational attainment, he said.

The Business Outlook Panel unveiled its annual forecast Thursday morning in Indianapolis and is scheduled to make presentations in nine other cities from Thursday until Nov. 18. A schedule can be found here:

Witte said "a long list of risks” are fueling doubts about next year’s economy, including “uncertainty about structural economic issues in China and across Europe, whether Federal Reserve moves could trigger a broad financial market event and lingering doubts about the federal government working together after one of the most contentious elections in modern history.”

The panel also predicted:

— The national labor market should match its current performance. Job gains will average below 150,000 per month, with little decrease in the unemployment rate.

— Inflation is rising in 2016 and will average about 1.5 percent for the full year. This trend should continue in 2017, with the personal consumption expenditures measure preferred by the Federal Reserve expected to reach its target 2 percent rate by year's end.

— The Federal Reserve will again raise rates in December and twice more in 2017.

— Consumer spending will continue to increase but at a rate lower than this year.

— Business investment and housing will grow but at rates below those earlier in the economic recovery after the Great Recession.

— The trade balance will further deteriorate, even with some increases in export growth.

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