Economists Forecast For 2010 Looks Better, Relative To This Year

"Better is not necessarily good," said Bill Witte, associate professor emeritus of economics at IU and a member of the Kelley School of Business' annual Business Outlook Panel. "2010 is going to be acceptable, except for the fact that we're starting from extremely low levels. Things will be getting better, but they still won't be really good."

Some have declared that the national recession is over. The Kelley School panel said any economic progress will continue to be weakened by the aftermath of a historically severe downturn. While output growth next year will be above 3 percent, "hangover from the financial crisis will hold the strength of the recovery below what would normally be expected following such a deep downturn."

Although the worst appears to be behind us, the panel today said it will take three to five years "to restore the luster to the economy and once again reach full employment."

In Indiana, 2010 also will be a "tough year … but not tougher than the nation as a whole," said Jerry Conover, director of the Indiana Business Research Center. "We forecast some economic growth for Indiana in the year ahead."

The panel presented its forecast this morning at the Columbia Club in Indianapolis. It also will present national, state and local economic forecasts in nine other cities across the state through Nov. 18. 

Witte, who also co-directs the Center for Econometric Model Research at IU, pointed to two factors -- cautious consumers who took dramatic hits to the values of their homes and other investments and small businesses still contending with tight credit -- as the primary sources of an economic headwind in 2010.

"Households are probably going to continue being cautious with their spending. They'll certainly take advantage of bargains when they see them," he said, citing as an example the Cash for Clunkers program, which led to a surge in auto sales followed by a return to a lower level of purchases.

"Looking at the next year or two, as households rebuild their financial situation, consumption is just not going to be a roaring, robust source of economic growth," he said.

Last weekend's bankruptcy of CIT Group Inc., a lending firm that traditionally served the small business sector, is another indication that credit markets are not yet a driving force in the recovery. Small businesses that depend on access to credit account for more than half of all new jobs created nationally.

"Credit availability for businesses -- particularly small businesses -- is still hampered," Witte said. "That means that small businesses are going to find it more difficult than they normally would, with a fully functional financial market, to finance investment and expansion of their businesses.

"If those small businesses are under financial pressure and find credit unavailable to finance their activities, inevitably it implies that the expansion's going to be hampered," he explained. "Of course, these two things feed off each other. If businesses aren't hiring, then the job market situation is not going to improve as much as it otherwise would. That in turn will probably make consumers more cautious."

Today's forecast said that the national labor market will lag behind output and unemployment will peak above 10 percent. Payrolls should add nearly 2 million jobs by year's end. Inflation will remain low through 2010 due to cautious consumer spending and continued high unemployment.

In Indiana, real personal income will grow about 2 percent higher than in 2009. This will be due partly to some improvement in state employment, Conover said.

"We have been hit harder than the rest of the nation in terms of jobs lost, percentage-wise, since we had a high share of manufacturing jobs to start with and manufacturing's been one of the hardest hit industries," Conover said.

"But there have been lots of announcements about expansions and companies opening up facilities where there were empty buildings before, abandoned by former manufacturers," he added. "I think we've got a lot going for us, in terms of being an attractive place for business, but I'm not expecting boom times for 2010."

The forecast said that Indiana will add up to 50,000 jobs during 2010. Government, construction and healthcare services will fare relatively better than other major sectors. Joblessness will remain a challenge, with the gradually shrinking unemployment rate still well above long-term averages at year's end.

Here are other highlights from today's forecast:

• The housing market will show some growth; but, like the overall economy, it will be muted. Home prices are expected to rise slowly in most markets. Nonresidential construction will be weighed down by excess supply and tight credit for firms seeking to buy or lease space.
• Interest rates will rise slightly, but remain low by historical standards, with some upward pressure possible late in the year. Mortgage rates will average 5 to 6 percent.
• Energy prices will be higher than 2009, but will remain far below the peak reached in 2008. Barring a severe supply disruption, crude oil prices will fluctuate between $60 and $90 per barrel.
• Business profits in most sectors will hold up due to major cost cutting that has occurred. The big gains in the stock market have already taken place; stock prices will grow more slowly in 2010.
• The global economy should expand by about 3 percent in 2010, with stronger growth in emerging economies, especially Asia. As in the U.S., global growth will fall short of the rates earlier in this decade. Along with some depreciation of the dollar, this will lead to growth in U.S. exports and possibly some further shrinkage in the trade deficit.

Looking past 2010, Witte said that he has major concerns.

"They come from the budget deficit and other actions that Washington seems to be on the verge of taking," he said, pointing to tax increases on business, costs of providing health care and regulatory actions. "It's an unsustainable situation, and beyond next year I'm very nervous."

The starting point for the forecast is the Econometric Model of the United States, developed by the Center for Econometric Model Research, which analyzes a variety of statistics to develop a national forecast for the coming year. The IBRC's Econometric Model of Indiana provides similar insights into where the state's economy is headed.

A detailed report on the outlook for 2010 will be published in the winter issue of the Indiana Business Review, available in December on the Web at www.ibrc.indiana.edu/ibr.