BALL STATE UNIVERSITY | CENTER FOR BUSINESS AND ECONOMIC RESEARCH INDIANA ECONOMIC OUTLOOK 2014: Nor th Central Indiana 2014 Economic Forecast for the U.S., Indiana, and North Central Indiana MICHAEL J. HICKS, PhD Director, Center for Business and Economic Research Professor of Economics, Miller College of Business Ball State University SRIKANT DEVARAJ, MS, MBA, PMP Senior Research Associate and Project Manager Center for Business and Economic Research Ball State University MORGAN M. LEWIS Student Research Assistant Center for Business and Economic Research Ball State University GRAPHICS BY THE CBER PUBLICATIONS TEAM Victoria Meldrum, Manager of Publications and Web Services McKenzie Records, Student Graphic Design Assistant Skyelar Huston, Student Graphic Design Assistant SPONSORED BY © 2013 Center for Business and Economic Research, Ball State University. SUPPORTED BY THANK YOU TO OUR SPONSORS FOR BRINGING THE INDIANA ECONOMIC OUTLOOK 2014 TO GOSHEN! NORTHERN INDIANA COALITION OF CHAMBERS The Coalition, founded in 2000, works with business, government, and community leaders to influence key public policy issues necessary to help grow the region. The Coalition is a collaboration of Chambers of Commerce from six counties, including Elkhart, Kosciusko, La Porte, Marshall, Starke, and St. Joseph counties in Indiana. Collectively, the group represents some 4,200 businesses and more than 200,000 employees in the region. Coalition members recognize that together they can offer a broader range of services, benefits, and competitive advantages to businesses in the region, and that together they represent a stronger, more influential voice on behalf of the business community. WWW.NICHAMBERCOALITION.ORG • NICC@NICHAMBERCOALITION.ORG Proud to be a Best Place to Work in Indiana As one of the largest energy providers in the state, we are powering lives each day through community partnerships, economic development and environmental stewardship. Together with our communities, we are building a bright future for northern Indiana. Learn more at NIPSCO.com. The United States Figure 1. Real GDP Growth at Annual Rates, First Quarter 2000-Fourth Quarter 2014 The United States economy will continue to perform poorly in a number of key areas through 2014. We estimate the topline measure of inflation adjusted gross domestic product (GDP) to grow at an annualized rate of 1.9 percent to 2.1 percent quarterly in 2014. This rate of GDP growth is greater than the post 2007-2008 recession and faster than the period of the great moderation from 1982-2007. See Figure 1. It reflects a U.S. economy that has recovered in total production of goods and services, but growth has not yet been sufficiently rapid to restore employment to the pre-recession levels.1 4% 3% 2% 1% 0% -1% -2% GDP Forecasted -3% LABOR MARKETS -4% U.S. labor markets continue to perform very poorly, with large numbers of unemployed across all demographic sectors. The coming year will show little real improvement in this condition. See Figure 2. We anticipate the U.S. economy will end the year with an unemployment rate of 6.7 percent, resulting in total employment gains of fewer than 1.8 million jobs through 2014. This will result in overall employment levels still 2.4 million beneath the pre-recession level. ‘00 ‘01 ‘02 ‘03 ‘04 ‘05 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11 ‘12 ‘13 ‘14 Note: Shaded years indicate recessions as determined by the National Bureau of Economic Research. Source: Ball State CBER using data from the Bureau of Economic Analysis, U.S. Department of Commerce. Figure 2. Unemployment Rate, First Quarter 2000-Fourth Quarter 2014 The U.S. labor force will remain very sluggish through the forecast period, but will remain roughly 2.5 percent beneath the pre-recession peak. While some slowing in the growth of labor force participation is due to demographic changes (e.g. retirement of Baby Boomers), federal policy changes that were inherent in the 2008 American Recovery and Reinvestment Act continue to contribute significantly to the low labor force participation. See Figure 3. 10.0% Labor market recovery in this recession has been historically poor, matched only by that of the Great Depression. Indeed, the labor market impact of this recession, in terms of jobs lost or regained is worse than all previous post-World War II recessions combined. Employment remains roughly 2 million beneath the pre-recession peak and will not return to precession levels until 2015 or later. Moreover, the appropriate working-age population has grown significantly since the start of the Great Recession. Today roughly 11.5 million workers are unemployed, and a further 8 million may be classified as unemployed under the broadest definition. The result is that perhaps 10 million workers or more than 7.5 percent of working-aged adults remain unemployed or marginally employed as a consequence of the Great 0% 7.5% 5.0% 2.5% Unemployment Forecasted ‘00 ‘01 ‘02 ‘03 ‘04 ‘05 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11 ‘12 ‘13 ‘14 Note: Shaded years indicate recessions as determined by the National Bureau of Economic Research. Source: Ball State CBER using data from the U.S. Bureau of Labor Statistics. Figure 3. Cumulative Change in the Labor Force, First Quarter 2000-Fourth Quarter 2014 3.0% Labor Force (% Change) Forecasted 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 1. The national models are estimated from the FAIR Model, which is explicated initially in Fair, Ray C. 1984. Specification, Estimation, and Analysis of Macroeconometric Models. Harvard University Press. -0.5% The Indiana Econometric Model and Midwest forecasts are explained in Hicks, Michael J. 2009. “Forecasting State-Level Economic Activity: An Error Correction Model with Exogenous National Structural Forecast Components.” Proceedings of the National Tax Association’s 101st Annual Conference on Taxation. INDIANA ECONOMIC OUTLOOK 2014 ‘00 ‘01 ‘02 ‘03 ‘04 ‘05 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11 ‘12 ‘13 ‘14 Note: Shaded years indicate recessions as determined by the National Bureau of Economic Research. Source: Ball State CBER using data from the U.S. Bureau of Labor Statistics. 1 BALL STATE CBER FORECASTING TOUR Figure 4. Job Creation Since the Beginning of Post-WWII Recessions (Monthly, Not Seasonally Adjusted) 20,000 1948 JOBS CREATED 2001 1969 5,000 1990 1960 10,000 1981 1957 15,000 1980 1953 Recession, while 8.5 million are unemployed due to more common conditions of job turnover and relocation that is not directly attributable to the recession. Figure 4 illustrates the change in employment from the start of each post-World War II recession through the start of the next recession (except for the current period, which is the obvious outlier in which net job growth has yet to return to pre-recession levels). Under any measure, the current labor market conditions represent a significant challenge across the spectrum of economic and social concerns. See Figure 4. 2007 1973 PRE-RECESSION JOB-CREATION LEVEL 0 -5,000 FINANCIAL MARKETS NBER RECOVERY BEGINS (JUNE 2009) -10,000 While equity markets continue to set records, it is clear that expectations of continued quantitative easing by the Federal Reserve bolster stock performance. Continued growth in the U.S. money supply (M1) reflects the impact of three rounds of quantitative easing. The choice to taper or terminate the third round of quantitative easing is likely once the unemployment rate signals a return to the nonaccelerating inflation rate of unemployment. See Figure 5. 115-120 109-114 MONTHS AFTER START OF RECESSION 103-108 91-96 97-102 79-84 85-90 73-78 67-72 61-66 55-60 49-54 43-48 37-42 31-36 25-30 19-24 13-18 1-6 7-12 START YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 YEAR 6 YEAR 7 YEAR 8 YEAR 9 YEAR 10 Note: Lines track job creation since the beginning of each recession through recovery until the next recessionary period as determined by the National Bureau of Economic Research. Source: Ball State CBER using data from the U.S. Bureau of Labor Statistics. Figure 5. Cumulative Change in Money Supply (M1), First Quarter 2000-Fourth Quarter 2014 Underlying the gloomy performance of labor markets is the excessive policy uncertainty that impedes capital investment and slows hiring. A recent economic uncertainty index provides clear evidence of the sustained levels of economic uncertainty inherent in our current economy. Continuing budgetary disagreements, deep uncertainty regarding labor costs due to the Affordable Care Act and unsustainable growth in the federal debt combine to impose significant uncertainty on the U.S. economy. It will persist throughout 2014. See Figure 6. 100% 75% 50% 25% MONEY SUPPLY FORECASTED 0% -25% In 2013, U.S. public debt reached 100 percent of GDP. While there is no apparent trigger point in the effect of debt on slower long-term growth, it is clear that this debt is viewed increasingly as a future tax increase and constitutes a constraining factor on long-term growth.2 ‘00 ‘01 ‘02 ‘03 ‘04 ‘05 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11 ‘12 ‘13 ‘14 Note: Shaded years indicate recessions as determined by the National Bureau of Economic Research. Source: Ball State CBER using data from the U.S. Federal Reserve. Figure 6. Economic Uncertainty Index, 1987-2013 300 200 FEDERAL SHUTDOWN SEQUESTER GULF WAR II GULF WAR I 9/11 TERRORIST ATTACKS AFFORDABLE CARE ACT STIMULUS 100 0 100 = INDEX AVERAGE ‘87 ‘90 ‘95 ‘00 ‘05 ‘10 ‘13* Note: Shaded years indicate recessions as determined by the National Bureau of Economic Research. * 2013 data includes January-October. 2. The view of debt as a future tax increases is commonly referred to as Ricardian equivalence. For a clearer understanding of the issue, Source: Baker, Scott R., Nicholas Bloom and Steven J. Davis. 2013. “Measuring Economic Policy Uncertainty.” Working paper. http://www.policyuncertainty.com see Barro, Robert J. “Are Government Bonds Net Wealth?.” The Journal of Political Economy 82, no. 6 (1974): 1095-1117, and critiques at Buchanan, James M. “Barro on the Ricardian Equivalence Theorem.” The Journal of Political Economy 84, no. 2 (1976): 337-342., and Stanley, Tom D. “New Wine in Old Bottles: A Meta-Analysis of Ricardian Equivalence.” Southern Economic Journal (1998): 713-727. INDIANA ECONOMIC OUTLOOK 2014 2 BALL STATE CBER FORECASTING TOUR Indiana and the Midwest MANUFACTURING The Midwestern states of Illinois, Indiana, Michigan, Ohio, and Wisconsin have experienced an economic downturn and recovery that largely mirrors the national economy. Moreover, these states are expected to see overall growth in GDP similar to that of the U.S. as a whole through 2014. See Figure 7. Much of the recovery story in the Midwest involves the remarkable recovery of the U.S. manufacturing sector since the deepest period of the recession. Of particular importance to the Midwest is U.S. automobile manufacturing. For the first seven years of the decade, monthly auto production (expressed in Figure 10 as millions of annual sales) hovered near 17 million cars and light trucks per year, punctuated by small spikes coincident with the 9/11 interest rate cuts and the introduction of the GM Friends and Family program in 2005. The individual state experience in personal income is also similar, with cumulative growth rebounding significantly since the recession. Here, Indiana and Wisconsin are expected to see accelerating personal income growth, while the remaining states will see growth, but at slower rates than in 2012 and 2013. See Figure 8. Employment growth in the Midwest has likewise failed to fully rebound, mirroring the national labor markets. See Figure 9. Our forecast suggests that no Midwestern state will return to the 2007 levels of employment during 2014. As the economy slid into recession, production of autos declined by more than 45 percent to annual sales of only 9 million by winter 2009. A brief spike during the Cash for Clunkers period in the summer months of 2009 occurred shortly after the darkest days for the industry. The recovery has exhibited strong growth and minimal Figure 7. Annual GDP Growth, U.S. and Selected States, 2006-2013 Figure 9. Cumulative Percent Change in Employment, Fourth Quarter 2007-Fourth Quarter 2014 3% 1% 2% 0% 1% -1% -1% -2% -3% -2% IN/Forecast US/Forecast WI/Forecast MI/Forecast IL/Forecast OH/Forecast 0% '06 '07 '08 '09 '10 '11 '12 '13 -3% -4% -6% '14 IL/Forecast IN/Forecast MI/Forecast WI/Forecast OH/Forecast -5% ‘07 ‘08 ‘09 ‘10 ‘11 ‘12 ‘13 ‘14 Note: Shaded years indicate recessions as determined by the National Bureau of Economic Research. Note: Shaded years indicate recessions as determined by the National Bureau of Economic Research. Source: Ball State CBER using data from the Bureau of Economic Analysis, U.S. Department of Commerce. Source: Ball State CBER using data from the U.S. Bureau of Labor Statistics. Figure 10. Annualized Monthly Sales Data for Autos and Light Trucks, January 2000-October 2013 Figure 8. Cumulative Real Personal Income Growth, Fourth Quarter 2007-Fourth Quarter 2014 25% 25 IN/Forecast WI/Forecast OH/Forecast IL/Forecast MI/Forecast 20% 15% 10% 9/11 INTEREST RATE CUTS GM FRIENDS AND FAMILY DISCOUNT 20 CASH FOR CLUNKERS 15 10 5% 5 0% -5% 0 '07 '08 '09 '10 '11 '12 '13 '14 Note: Shaded years indicate recessions as determined by the National Bureau of Economic Research. * 2013 data includes January-October. Note: Shaded years indicate recessions as determined by the National Bureau of Economic Research. Source: Ball State CBER using data from the Bureau of Economic Analysis, U.S. Department of Commerce. Source: Ball State CBER using data from the U.S. Bureau of Labor Statistics. INDIANA ECONOMIC OUTLOOK 2014 ‘00 ‘01 ‘02 ‘03 ‘04 ‘05 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11 ‘12 ‘13* 3 BALL STATE CBER FORECASTING TOUR volatility, which is readily attributable to interest rate stability, with the only significant deviation from trend accompanying the rise in oil prices through spring 2011, and the recent increase in interest rates through late summer and early autumn 2013. Still, excess production capacity remains, with production now only at 88 percent of prerecession levels. See Figure 10. of the late 1990s. Illinois will not again see a manufacturing production peak until the end of 2014. A clear example of the divergent paths of manufacturing production within the region is apparent in the changes to the national share of manufacturing production in the local Midwest. Share declines have occurred for Michigan, Ohio, Wisconsin, and Illinois, while Indiana has seen its share of national manufacturing rise across the past decade and a half. See Figure 12. The effect of constant production growth in automobiles is reflected in consistent real income growth in durable goods manufacturing, which experienced one of the deepest of recession-related declines. In Michigan alone, a decline in durable goods incomes reached 10 percent in one quarter of 2009 as GM and Chrysler declared bankruptcy and automobile production and assembly operations were idled throughout the nation. See Figure 11. SUMMARY Overall economic activity through 2014 will frustrate Americans seeking an end to the economic difficulties that have gripped the nation since winter 2007. Sectoral adjustment will continue to occur, with state and local government employment declining, as will health care in many states. Where health care grows, it is forecasted to expand by less than a half a percent, marking a historical change in health care employment and incomes. Policy uncertainty surrounding the implementation of the Affordable Care Act along with reimbursement and insurance changes will continue to cast a pall over economic activity in this sector. Overall, 2014 marks yet another difficult and uncertain year for the beleaguered U.S. economy. See Table 1. The rebound in the manufacturing sector is an important contributor to growth overall in individual Midwestern states. As manufacturing rebounds nationally, 2013 marks the record year of inflation-adjusted manufacturing production in the United States, with 2014 forecasted to mark yet another manufacturing peak. In Indiana, the full manufacturing recovery occurred a year earlier, in 2012, while Wisconsin, Michigan, and Ohio remained far below their peak production years Figure 11. Quarterly Change in Durable Goods Manufacturing Income, 2008-2014 10% WI/Forecast OH/Forecast IN/Forecast MI/Forecast 5% Table 1. State Forecasts for 2014 (Percent Growth) IL/Forecast IL 0% GDP growth IN MI OH WI 1.50% 2.19% 1.50% 1.30% 1.60% Employment gains 64,273 57,380 36,041 59,861 68,919 Employment growth 0.46% 0.85% 0.36% 0.48% 1.02% 8.8% 7.1% 8.4% 6.9% 6.1% Growth 2.19% 2.51% 1.73% 1.73% 2.15% Figure 12. Share of National Manufacturing Production in Midwestern States, 1997-2014 Manufacturing 0.46% 0.85% 0.36% 0.48% 1.02% Durable goods manufacturing 2.54% 3.64% -0.93% 0.44% 5.96% 10.0% Construction 0.60% 3.57% 0.41% 1.38% 4.13% Health care 0.31% -0.09% 0.07% 0.33% -0.16% Transportation and warehousing 0.99% 1.86% 1.33% 1.37% 2.12% Trade (retail and wholesale) 1.89% 2.62% 0.89% 1.94% 2.28% Finance 0.75% 2.03% 1.23% 1.21% 2.33% Utilities 0.70% 0.40% 1.28% 0.91% 1.13% Information technology 0.07% 0.18% 0.11% 0.10% 0.14% -0.11% -0.12% -0.12% -0.11% -0.11% Labor Market -5% -10% 2008 2009 2010 2011 2012 2013 2014 Note: Shaded years indicate recessions as determined by the National Bureau of Economic Research. Unemployment rate Source: Ball State CBER using data from the U.S. Bureau of Labor Statistics. Personal Income 7.5% 5.0% IL/Forecast OH/Forecast IN/Forecast MI/Forecast WI/Forecast 2.5% 0% ‘97 ‘98 ‘99 ‘00 ‘01 ‘02 ‘03 ‘04 ‘05 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11 ‘12 ‘13 ‘14 State and local government Note: Shaded years indicate recessions as determined by the National Bureau of Economic Research. Source: Ball State CBER using data from the U.S. Bureau of Labor Statistics. INDIANA ECONOMIC OUTLOOK 2014 Source: Ball State CBER using data from the U.S. Bureau of Labor Statistics. 4 BALL STATE CBER FORECASTING TOUR South Bend ELKHART North Central Indiana LaGrange Goshen ST. JOSEPH LAGRANGE NOBLE Albion Plymouth North Central Indiana is comprised of Elkhart, Kosciusko, LaGrange, Noble, Marshall, and St. Joseph counties. The region is home to more than 712,000 persons with a per capita income of $32,048. More than one-tenth of Hoosiers work in the region, totaling more than 390,000 jobs. Since the end of the Great Recession, the region has seen a population growth of 0.22 percent, per capita income growth of more than 11 percent, and employment growth of 4.06 percent. KOSCIUSKO MARSHALL Warsaw THE CALL Very strong growth in 2014. GDP +4.6%. Employment +2,204. THE ECONOMY The post-recession period has seen strength in most sectors of the North Central Indiana economy. From the end of the recession to the most recent data available, we observe significant employment growth in utilities, manufacturing, transportation and warehousing, management and administrative services (both likely comprising human resource support for manufacturing firm), health care, real estate services, and arts and recreation. Though growing quickly, mining represents a modest share of regional employment. Declines of note occurred in utilities, construction, retail trade, information services, accommodations, and government. See Table 2. Table 2. Post-Recession Employment Growth, 2010-2013 Sector Percent Growth Farm employment 0.73% Forestry, fishing, and related activities N/A Mining 265.22% Utilities 17.67% Construction -11.09% Manufacturing 14.13% Wholesale trade 5.96% Retail trade -0.18% Transportation and warehousing The composition of local economic activity includes large shares of government, education, and health care, which together comprise 29 percent of incomes. The heavy reliance on government and the health care sector means that the Affordable Care Act may offer risk to the region, with uncertain outcomes influencing employment in both sectors. The long-term effect of the ACA is unlikely to mirror the short-term effects. See Figure 13. 203.63% Information 96.81% Finance and insurance -0.28% Real estate and rental and leasing -0.77% Professional, scientific, and technical services 0.64% Management of companies and enterprises 11.22% Administrative and waste management services 18.95% Educational services 1.75% Accommodation and food services The North Central Indiana region is forecasted to grow through 2014 at a much faster rate than both the nation and the state as a whole. We project this region to see GDP growth of 4.6 percent, and growth of more than 2,204 jobs by the end of the year. Personal income will grow by 4.9 percent, led by growth of durable goods manufacturing, construction, trade, and finance. The manufacturing recovery, which has been so obvious in the region, will extend to other sectors, and this region will see broad growth across all sectors in 2014. See Table 3. 3.06% Other services, except public administration 70.66% Government and government enterprises -2.26% Source: Ball State CBER using data from the U.S. Bureau of Labor Statistics. Figure 13. Composition of Regional Economy, 2013 Health Care 13.68% The post-recession period in Indiana is marked by a significant manufacturing rebound, and examining that rebound and trend yields insight into the future of manufacturing growth in the state. In North Central Indiana, durable goods manufacturing is now beneath its long-term trend. This suggests that significant new growth in the sector is likely and that the recession rebound has not yet run its course. New income and job growth in this sector will be due to both INDIANA ECONOMIC OUTLOOK 2014 0.26% Arts, entertainment, and recreation THE FORECAST 5.07% Health care and social assistance Durable Goods 34.84% Nondurable Goods Mfg 11.51% Government & Education 11.45% Wholesale 7.54% Retail 7.18% Finance, Insurance, & Real Estate 5.43% Construction 5.13% Transportation 1.74% Information Services 1.26% Utilities 0.22% Mining 0.02% Source: Ball State CBER using data from the Bureau of Economic Analysis, U.S. Department of Commerce. 5 BALL STATE CBER FORECASTING TOUR Table 3. State and Regional Forecast for 2014 (Percent Growth) Indiana GDP growth the rebound and longer-run effects of a better fiscal climate in the state. The region is very well positioned to observe continued manufacturing growth through the forecast period. See Figure 14. North Central Indiana 2.19% 4.6% 57,380 2,204 An important note for the region is the enormous structural change that has occurred within the private sector. To understand this, we produce a graphic that depicts income earned from regionally ‘exportable’ goods and services, and those that are not regionally ‘exportable.’ Over the past four decades, the share of personal income earned in sectors that produce goods exported outside the North Central Indiana region has dropped slightly from just under 60 percent to roughly 50 percent of incomes. This remains an unusually high share of exportable (primarily manufactured) goods and services. The implication from this is that employment growth in North Central Indiana will increasingly depend more upon the growth of the regional population, and less upon attracting firms that produce goods sold outside of the region. See Figure 15. Labor Market Employment gains Personal Income Growth 2.5% 4.9% Manufacturing 0.8% 3.2% Durable goods manufacturing 3.6% 6.0% Construction 3.6% 6.0% Health care -0.1% 0.1% Transportation and warehousing 1.9% 4.3% Trade (retail and wholesale) 2.6% 5.0% Finance 2.0% 4.4% Utilities 0.4% 2.8% Information technology 0.2% 2.6% -0.1% 2.3% Education, state and local government North Central Indiana has been buffeted by the Great Recession, seeing some of the worst downturns and some of the largest rebounds of any location in the nation. Overall, 2014 will continue to see broadbased growth in North Central Indiana, with continued high levels of manufacturing production and employment in the region. This growth is fueled partly by the expansion of existing operations, but also by post-recession growth, above that which would be expected if the region were only to return to a post-recession trend. Source: Ball State CBER using data from the U.S. Bureau of Labor Statistics. Figure 14. Share and Trend in Durable Goods Manufacturing, 1969-2011 50% Durable Goods Share Trend (R2 = 0.06084) 45% 40% RECENT NEWS AND DEVELOPMENTS FOR NORTH CENTRAL INDIANA 35% 30% '69 '75 '80 '85 '90 '95 '00 '05 '11 • ELKHART COUNTY: Drew Industries Inc. announced in April that it would relocate to Elkhart County from New York and add 800 Hoosier jobs by 2017. Note: Shaded years indicate recessions as determined by NBER. Source: Ball State CBER using data from the BEA. • ELKHART COUNTY: Zeeland Lumber Operations, LLC is opening a new facility in Elkhart to expand distribution and sales services in southern Michigan and northern Indiana. The company will invest $1.56 million to purchase and equip the new facility, which will create up to 72 jobs by 2016. Figure 15. Share of Income Linked to Regional Exportable and Non-Exportable Production, 1969-2011 60% • LAGRANGE COUNTY: Exo-s US, LLC is relocating its headquarters and will invest $7 million in the new facility, receiving $2.75 million conditional tax credits and $225,000 training grants from IEDC. The company plans to create 250 new jobs in LaGrange County by 2016. 50% 40% • KOSCIUSKO COUNTY: Poly-Wood Inc. is expanding to allow for additional manufacturing space and is expected to create 38 new jobs in 2014. '69 '75 '80 Non-Exportable Industries (e.g. services) Exportable Industries (e.g. production) '85 '90 '95 '00 '05 '11 • NOBLE COUNTY: Busche Enterprise Division Inc. announced a new contract that will allow the Albion-based company to create two dozen jobs in 2014. Note: Shaded years indicate recessions as determined by NBER. • NOBLE COUNTY: Tenneco, Inc. recently launched a new product line for Chrysler and is hiring 100 new employees at its Noble County plant. Source: Ball State CBER using data from the BEA. INDIANA ECONOMIC OUTLOOK 2014 6 BALL STATE CBER FORECASTING TOUR About This Forecast DATA SOURCES Economic forecasts are designed to provide insight into the expected path of economic activity. The goal is to improve planning for businesses and government. All forecasts are wrong (we can arithmetically predict the number of workers down to the tenth decimal place), but the hope is that they are useful. For example, a business considering expansion into a region may wish to consult the forecasts for population growth for that region. Likewise, a local school corporation considering building additional classroom space might wish to consult that same population forecast. Forecasts like this can be useful in planning because they offer a benchmark from which to assess the current state of the economy. Forecasts also offer the opportunity to examine both recent and longer term changes to an economy. This permits some deeper reflection on the direction of a region’s economy. The data are publicly available from the U.S. Census Bureau, the Bureau of Labor Statistics, the Bureau of Economic Analysis at the U.S. Department of Commerce, and freely available data sources at the Federal Reserve Bank. Much of these data were unavailable from the federal government during the October government shutdown, and the key regional variables used to predict the sub-state regional economy are scheduled to be terminated with the upcoming second wave of sequestration in 2014. RESEARCH As a publicly supported university, these forecasts are designed to provide both a tool to businesses and government, but also provide a learning opportunity to students. Much of the data were obtained by student research assistants at the Center for Business and Economic Research and by the Business and Economic Forecasting Group at Ball State University. The forecast models were prepared and run by students, staff, and faculty within these organizations. The design and production of the forecast information was performed by staff and students at the Center for Business and Economic Research. NATIONAL MODEL To perform this forecast we begin with a national forecast model of the U.S. economy. This model, produced by Ray C. Fair, is available at http://fairmodel.econ.yale.edu and is offered to scholars with frequent updates. This model is a traditional econometric forecast model in that assumptions regarding the behavior of agents (households and businesses) follow closely decades of observed behavior. The model assumes that agents adjust their consumption, production, and investment decisions adaptively, and that the speed of this adjustment varies with decisions and time. Thus actual data experience drives the speed of these adjustments. The Fair Model we employ consists of 225 equations to predict key variables of the U.S. economy. STATE MODEL The state model we employ is the Indiana Econometric Model, which employs a combination of predicted national variables, historical data on the Indiana economy, and discrete policy or temporal variables (e.g. trends, recessionary periods, time since the passage of the Affordable Care Act) to predict both quarterly and annual changes to the Indiana and Midwestern economies. For the state-level Midwestern economies we employ 213 equation models, for sub-state regions we use a model of 129 equations. The only non-traditional assumption employed in this model is that the Indiana economy is assumed to play no meaningful role on the overall U.S. economy. That is wrong, of course, but relaxing it dramatically increases the computational cost of the estimate without adding significant improvements in the forecast. “Key regional variables used to predict your local economy are scheduled to be terminated with the upcoming second wave of sequestration in 2014.” – Michael J. Hicks INDIANA ECONOMIC OUTLOOK 2014 7 BALL STATE CBER FORECASTING TOUR About the Author Meet the Staff Michael J. Hicks, PhD is the director of the Center for Business and Economic Research and a professor of economics in the Miller College of Business at Ball State University. He came to Ball State following stints at the Air Force Institute of Technology’s Graduate School of Engineering and Management and research centers at Marshall University and the University of Tennessee. Hicks’ research has focused on issues affecting local and state economics. His work on the effects of federal regulation of energy and mining industries has resulted in testimony in state and federal courts and the U.S. Senate. His research has been highlighted in such outlets as the Wall Street Journal, the New York Times, and the Washington Post. He has appeared nationally on CSPAN, MSNBC, NPR’s “All Things Considered,” and Fox Business News. His weekly column on economics and current events is distributed through newspapers including the Indianapolis Business Journal, the South Bend Tribune, and the Star Press. Michael J. Hicks, PhD Director of the Center and Professor of Economics Dagney Faulk, PhD Director of Research Srikant Devaraj, MS, MBA, PMP Senior Research Associate and Project Manager Lisa Goodpaster Secretary to the Center Victoria Meldrum Manager of Publications and Web Services Graham Watson Web Development Manager About Ball State CBER The Center for Business and Economic Research (CBER) is an economic policy and forecasting research center at Ball State University. CBER research includes public finance, regional economics, manufacturing, transportation, and energy sector studies. View our latest studies and publications at www.bsu.edu/cber/publications. The Center produces a suite of web-based data tools (the CBER Data Center) and the Indiana Business Bulletin, a weekly e-newsletter with regularly updated data and commentary on current issues. In addition to research and data delivery, CBER serves as a business forecasting authority in Indiana’s east central region—holding the annual Indiana Economic Outlook and quarterly meetings of the Ball State University Business Roundtable. CONNECT TO US Receive news on the latest data releases, published studies, and economic forecasting events through BallStateCBER accounts on Facebook and Twitter. GRADUATE ASSISTANTS Chelsea Moccia – Research Phil Morris – Research Pam Quirin – Research and GIS UNDERGRADUATE ASSISTANTS Adam Dally – Web Development Lauren Fosnight – Research Skyelar Huston – Graphic Design Liz Landers – Research Morgan Lewis – Research Natalie Martin – Research McKenzie Records – Graphic Design Erica Walsh – Research INDIANA ECONOMIC OUTLOOK 2014 Center for Business and Economic Research Ball State University (WB 149) 2000 W. University Ave. Muncie, IN 47306-0360 Phone: 765-285-5926 • Email: cber@bsu.edu INDIANA ECONOMIC OUTLOOK 2014 8 BALL STATE CBER FORECASTING TOUR www.bsu.edu/cber