Forecast Calls For U.S. Economic Growth To Continue — Slowly

The economic forecast for next year is similar to last year's prediction, but with one caveat.

"A year ago we forecast that the economy would grow and improve in 2019, relative to 2018," said Kyle Anderson, assistant professor of business economics at Indiana University. "Unfortunately, we turned out to be too optimistic in that forecast."

Anderson was one of three panelists who spoke Tuesday at the Indiana Memorial Union during a business outlook luncheon. The Bloomington Rotary Club and the Greater Bloomington Chamber of Commerce helped organize the local event. IU Kelley School of Business faculty will present the 2020 economic forecast at similar events that will take place in other cities across Indiana this month.

Right now, the national economy is poised to grow about 2% in 2020. Anderson characterized that as "OK."

"But it's not great and it's certainly not as good as it was a year ago," he said.

Last year, economic forecasters had concerns about international trade friction and a slowing global economy. Now, it's clear those concerns were warranted.

Manufacturing, in particular, seems to have taken a hit. That sector has been down over the past 12 months and Anderson expects that to continue. Part of the decline is due to lack of trade.

This contraction is important at the state level because Indiana is heavily dependent on manufacturing, said Jill Long Thompson, professor of ethics at Kelley and the IU O'Neill School of Public and Environmental Affairs.

More than a quarter of Indiana's gross state product comes from manufacturing, but car and light truck sales are expected to drop by about 2% in 2020.

"As you know, manufacturing is very impacted by trade disagreements and uncertainties," Thompson said.

Trade disputes have had an even greater impact on agriculture. The industry only makes up about 2.4% of the state's economy, but it does affect other areas, such as heavy equipment sales.

"The trade war is hurting demand, and that impacts rural communities and the rural economy," Thompson said.

There were some bright spots in the economy -- such as low unemployment and strong consumer spending -- but panelists warned other factors could negatively impact those figures.

Nationally, unemployment is about 3.5%. If it drops below that, the jobless rate will be the lowest it's been since the post-World War II era in the 1950s, Anderson said. Indiana is basically at full employment, Thompson said.

Low unemployment helps consumer spending, a component of gross domestic product that has remained strong. But other components of GDP, such as business and housing investment, are much weaker. Housing investment has been negative for eight of the last 10 quarters, Anderson said.

"These weak investment numbers are really pretty troubling, given that we have very low interest rates, which should seem to spur investment," he said.

Recent tax cuts have also not led to projected business investment, Thompson said. Instead, companies have used the extra money to buy back stock.

This prompted a member of the audience to ask whether consumers should be worried about their spending habits since businesses are afraid of investments. Anderson answered with an unequivocal yes. Business investment drives productivity growth and productivity growth, over the long run, helps lead to wage gains.

"I think that if we don't have business investment, one of the ways that that feeds out is consumer spending is going to go down, because wages are not going to increase and we're not going to have the same rate of job growth," Anderson said.

Of course, there is a level of uncertainty with any forecast. This was evident in panelist Charles Trzcinka's response to an audience question about whether, with all the data available today, accuracy in economic predictions has increased over time.

"The amount of data is growing and the accuracy is falling," said the professor of finance at IU's Kelley School.

The reason is because some of what is classified as data is really a collection of anecdotes. For instance, the unemployment rate is based on a household survey.

"We have the illusion that we can forecast," Trzcinka said. "In my view, we're having a harder and harder time forecasting, unless the data is collected specifically for the thing that you might forecast, and that's not common."

Contact Michael Reschke at 812-331-4370, [email protected] or follow @MichaelReschke on Twitter.

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