Economic Forecast Summary

The following forecast summaries were developed by the Center for Econometric Model Research at Indiana University.

The U.S. Economic Outlook is as of March 2008 and the the Indiana Economic Outlook is as of February 2008.

The U.S. Economic Outlook

In the 10 days since our quarterly meeting, the prognosis for the economy has taken another turn for the worse. The latest bad news was in the labor market report for February, which was almost uniformly negative. Overall payroll employment recorded a decline of 63 thousand for the month, but this included an increase of 38 thousand for the government sector, meaning that private sector employment was down by 101 thousand. In addition there were downward revisions to December and January. Moreover, the decline, while most severe in construction and manufacturing, also touched retail trade and business services.

The one glimmer of hope - a decrease in the unemployment rate from 4.9% to 4.8% - was wrapped in a cloud. It reflected a large decline in the labor force (450 thousand or 0.3%) that was not quite matched by the decrease in employment as measured by the household survey (255 thousand or 0.2%). The fact that almost one-half million people left the labor market (rather than choosing to look for work) cannot be a good sign.

The only other pieces of new information of any significance were the Institute for Supply Management indices for February. These were mixed in direction (manufacturing fell 2.4 points; non-manufacturing rose 4.7 points), but negative in level. Both indices are now below 50 indicating contraction in activity.

We think the employment numbers imply that the economy is now in a recession, and our control forecast now reflects this judgment. It has negative growth both in the current and the second quarter, followed by a better second half as Fed stimulus and tax rebates provide some boost to demand. In this scenario the unemployment rate rises to 6.2% during the fourth quarter and remains at that level during 2009. The economy loses over 1 million jobs by the end of this year.

The Indiana Economic Outlook

Changes in our state forecast are a reflection of two factors. The first is new state data and revision to past data, which are sometimes quite significant. The second is changes in our outlook for the national economy.

Data

Since the November forecast the Bureau of Economic Analysis has revised the quarterly personal income estimates for only the first two quarters of 2007, lowering both. For the second quarter the reduction was $1.5 billion, which amounts to 0.7%. The new data for the third quarter (the latest available) was $1.1 billion below our November estimate, but the second to third quarter growth was close to our forecast.

For employment, there was a small downward revision for 2007 third quarter. The value for the fourth quarter, however, was significantly below our November forecast.

Forecast

Our new income forecast is somewhat weaker than in November. Unlike the pattern the past three years the forecast growth in income keeps pace with the nation.

Our employment forecast is weaker than November, primarily because of a higher estimate of unemployment paralleling a similar change in our national outlook. Employment performance is below the nation as a whole. Over the forecast period Indiana employment grows at an average annual rate about 0.2% below the nation.