According to a panel of experts assembled by Indiana University, the economy outperformed projections this year, but trouble could be over the horizon.
Last week the IUK School of Business convened its 2018 Economic Outlook Panel, with various professors and researchers from the school coming together to weigh in on the economy at all levels, from the national to the local. According to the panelists, the economy enjoyed a continued upswing over the last year and likely will continue to thrive through the first portions of 2019. After that, factors such as inflation, a potential trade war, and the tariffs may take hold.
During the previous Economic Outlook Panel, the experts predicted a national 2.5-percent GDP growth in 2018. That prediction turned out to be a bit conservative, conceded Kyle Anderson, a clinical assistant professor of business economics at the Kelley School of Business in Indianapolis.
“If anything our forecast understated the amount of growth, and we are much more likely to come out of 2018 with 3-percent growth, 3.1 percent, which will be the highest since our great recession in 2008,” said Anderson.
Other indicators within the national economy remain strong, with unemployment below 4 percent.
Over the next 12 months, Anderson predicted growth would remain close to 3 percent on an annualized rate, especially within the first half of next year. He believed the latter portion of next year will bring a deceleration to that growth.
“The Federal Reserve is concerned about the potential for inflation. As a result, we’ll see interest rates continue to rise in 2019, and that will dampen some economic growth,” said Anderson. “Overall, our forecast model is indicating some really positive numbers. However, there are a number of threats to that economic growth that are worth looking at.”
Those risks are political and policy-related. More specifically, Anderson referenced uncertainty that could be brought about by looming trade wars with China and, to a lesser extent, the European Union. NAFTA 2.0 also could bring about risk, creating a drag on the economy.
To Anderson, recent closings announced by General Motors also could signal that corporations are preparing for a slowdown in the economy.
“Closing out product lines that have been under-performing, closing down factories, those are steps corporations take when they see a potential economic slowdown coming,” said Anderson. “That may not be unique to General Motors, but it may be a trend that picks up. And if so, that could dampen growth in 2019.”
Locally, the economy remains strong as well. Alan Krabbenhoft, the dean of the School of Business at IUK, spoke during the panel about the state of the local economy.
Krabbenhoft touted a local unemployment rate that’s hovered consistently at about 3.7 percent. Favorable weather has driven up local agricultural production, but prices are less favorable in regards to corn and soybeans.
The trade war, which resulted in China placing trade restrictions on pork from the United States, also has created a drag on domestic swine production.
The IUK dean also noted that attempts to diversify the local economy, more specifically through the service industry via expanded downtown development, could continue to strengthen the local economy. But that growth could be hampered by potentially rising interest rates.
“We would hope to maintain a moderate rate of growth,” said Krabbenhoft. “I would love to see it at 3 percent, but my gut instinct is that I’m going to be a little less optimistic and say, locally, we’re looking at 2.5 percent, at best, due to some of the concerns we have.”
Also amongst Krabbenhoft’s concerns were the trade wars, which he feared could hamper local industry.
In an accompanying paper the dean penned ahead of the panel, he wrote, “If the trade war continues, or possibly even worsens, certainly farmers in the Midwest will continue to be among the hardest hit. The impact also will be felt by domestic automobile manufacturers and other users of steel. The tariffs on imported steel continue to put pressure on manufacturers’ bottom lines. Certainly, the question is how long they can sustain rising costs before they are forced to pass such cost increases on to their customers. If that starts to happen, inflationary pressures will continue to ramp up and threaten to push interest rates even higher as the Fed will work to keep inflation in check.”