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© 2015 IHS
US Outlook
IHS
Indiana Economic Outlook
Indiana State Budget Committee
April 16, 2015
Tom Jackson, Principal Economist
+1 215 789 7432, tom.jackson@ihs.com
ECONOMICS
© 2015 IHS
The US economic expansion will continue
• Several forces held back growth in the first quarter—harsh weather,
West Coast port disruptions, and the plunge in oil and gas drilling.
• Consumers will step up spending in response to lower energy prices
and robust gains in employment, real income, and net worth.
• The recovery in homebuilding will gain momentum as labor markets
improve and credit standards ease.
• A strong dollar, reductions in energy-related investments, and a
slowdown in inventory accumulation will be restraints on growth.
• Interest rates will rise significantly from late 2015 through 2017 as
monetary accommodation is gradually withdrawn.
• Oil prices are expected to reach a cyclical low this spring and then
recover as supply growth slows.
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Indiana Economic Outlook / April 2015
© 2015 IHS 4
Indiana Economic Outlook / April 2015
US real GDP growth and the unemployment rate
Real GDP and unemployment rate
© 2015 IHS
Key US economic indicators
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Indiana Economic Outlook / April 2015
Key indicators
Percent change 2014 2015 2016 2017
Industrial production 4.2 1.9 2.9 3.1
Payroll employment 1.9 2.1 1.5 1.2
Light-vehicle sales (Millions) 16.4 16.9 17.2 17.7
Housing starts (Millions) 1.00 1.12 1.31 1.46
Consumer Price Index 1.6 -0.4 2.1 2.4
Core CPI 1.7 1.7 2.0 2.1
Brent crude oil price ($/barrel) 100 55 65 73
Federal funds rate (%) 0.1 0.3 1.2 2.9
10-year Treasury yield (%) 2.5 2.2 2.9 3.6
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Indiana Economic Outlook / April 2015
Interest rates will rise from exceptionally low levels
Interest rates
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Indiana Economic Outlook / April 2015
Services recorded the largest employment increases
during the 12 months ended March 2015
Change in payroll employment, thousands
Total change = 3.1 million
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Indiana Economic Outlook / April 2015
US employment growth will decelerate as the economic
expansion matures
Payroll employment
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Indiana Economic Outlook / April 2015
With the population aging, labor-force participation and
employment rates will not return to prerecession levels
Labor-force participation and employment rates
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Indiana Economic Outlook / April 2015
Labor compensation will accelerate as markets tighten
and the Affordable Care Act is implemented
Labor compensation
© 2015 IHS
Indiana Economic Outlook / April 2015
The drop in gasoline prices means substantial near-term
savings for US households
11
Retail gasoline price and annualized spending on motor fuels
11
© 2015 IHS 12
Indiana Economic Outlook / April 2015
The recovery in light-vehicle sales nears completion;
low gasoline prices boost demand for light trucks
Light-vehicle sales
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Indiana Economic Outlook / April 2015
The consumer spending expansion will broaden in 2015
Nominal consumer spending
Percent change
© 2015 IHS
The recovery in housing markets will strengthen
• Our forecast has been revised to show a more gradual recovery in
housing starts in 2015‒20.
• Sustained job growth will support increases in housing demand.
• Credit availability is improving for home buyers and builders.
• In 2016‒17, rising mortgage rates will restrain growth in home sales.
• Multifamily units will account for about one-third of housing starts.
• Young adults are delaying homeownership.
• Baby boomers are starting to downsize.
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Indiana Economic Outlook / April 2015
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Indiana Economic Outlook / April 2015
Housing starts and home prices are recovering
Housing starts and home prices
* Purchase-only index
© 2015 IHS 16
Indiana Economic Outlook / April 2015
Single-family home sales and construction are not
expected to reach 2005 peaks
Single-family housing starts and sales
© 2015 IHS
A gradual acceleration in the global economy
• Global growth will gradually pick up, but foreign trade will remain a drag
on the US economy through 2017.
• The Eurozone’s recovery is gaining momentum, aided by monetary
stimulus, euro depreciation, and pent-up demand.
• China’s growth will slow to 6.5% in 2015, restrained by imbalances in
credit, housing, and industrial markets.
• The plunge in commodity prices and policy mistakes are contributing to
recessions in Russia, Argentina, Brazil, and Venezuela.
• Growth paths in emerging markets will depend on structural reforms
that raise productivity and allocate capital more efficiently.
• Asian markets offer the best opportunities for US exports.
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Indiana Economic Outlook / April 2015
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Indiana Economic Outlook / April 2015
The dollar’s real exchange value has appreciated,
reaching an 12-year high against major currencies
Real trade-weighted dollar index
© 2015 IHS 19
Indiana Economic Outlook / April 2015
Risks to the US forecast
Scenario Characteristics
Recovery stalls
(Probability = 15%)
• Low household formation rates stall the housing recovery.
• Consumers spend more cautiously as asset prices retreat.
• Weak growth in foreign economies hurts exports.
• The Federal Reserve (Fed) delays interest-rate hikes to
mid-2017.
Recovery reignites
(Probability = 15%)
• Stronger job and wage growth spark consumer spending.
• Housing markets rebound more vigorously.
• Stronger global economic growth lifts US exports.
• The Fed raises interest rates more quickly in 2015‒16.
Baseline forecast
(Probability = 70%)
• The Fed starts to raise interest rates in September 2015.
• Housing markets steadily recover in 2015–19.
• Global economic growth picks up moderately.
• There are no major changes in federal government tax or
spending policies.
© 2015 IHS
Bottom line for the US economy
• Real GDP growth is projected to pick up to 2.8% this year, led by a
broadly based acceleration in consumer spending.
• Consumer spending will be supported by gains in employment, real
disposable income, and household wealth.
• Homebuilding will rise as household formation recovers.
• Real capital spending will increase about 4–6% annually in 2015–17 as
more businesses need to expand capacity.
• Net exports will restrain US economic growth through 2017, largely due
to the dollar’s appreciation.
• The Federal Reserve will begin to raise the federal funds rate in
September; interest rates will increase through 2017.
• Core inflation will stay mild.
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Indiana Economic Outlook / April 2015
© 2015 IHS
U.S. Regional Outlook
• States in the West and Sunbelt will continue to growth fastest.
• These states saw the worst housing busts.
• Population growth fastest in these regions.
• People go where the jobs are, but jobs also go where the people are.
• Manufacturing gains, especially from the auto sector supply chain, have
been a key to the improving Midwestern economy.
• Growth in unconventional oil and gas development has also boosted
growth in many sectors, including in non-producing states.
• Steel pipe, machinery, transportation, construction.
• Most states are net “winners” from low oil and natural gas prices, due to
savings to consumers.
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Indiana Economic Outlook / April 2015
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Indiana Economic Outlook / April 2015
Employment growth concentrated in West, Southeast
for 2015
Percent change year ago
0.4 to 1.1
1.2 to 1.5
1.5 to 1.9
2.0 to 3.5
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Indiana Economic Outlook / April 2015
Employment growth set to improve in 2015
-7
-6
-5
-4
-3
-2
-1
0
1
2
3
2,700
2,750
2,800
2,850
2,900
2,950
3,000
3,050
3,100
3,150
3,200
2009 2011 2013 2015 2017 2019
Level Growth
Indiana employment
Source: IHS © 2015 IHS
Th
ou
sa
nd
s
Pe
rce
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an
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ye
ar
ag
o
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Indiana Economic Outlook / April 2015
Indiana wage growth lagged nation in 2014 Weighted annual average wage, all sectors
-3
-2
-1
0
1
2
3
4
5
6
2009 2011 2013 2015 2017 2019
Indiana United States
Indiana wage growth vs. United States
Source: IHS © 2015 IHS
Pe
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an
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o
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Indiana Economic Outlook / April 2015
Indiana housing starts will improve in 2016 and beyond Auto sales growth to slow as recovery matures
0
5
10
15
20
25
30
0
50
100
150
200
250
300
2009 2011 2013 2015 2017 2019
New car registrations, left axis Total housing starts, right axis
Indiana total housing starts and new car registrations
Source: IHS © 2015 IHS
Th
ou
sa
nd
Th
ou
sa
nd
Pre-recession peak was
40,000 starts in 2003.
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Indiana Economic Outlook / April 2015
Population continues to move south, west;
Northeast getting left out in the cold
Percent
0.0 to 0.3
0.4 to 0.6
0.6 to 0.9
1.0 to 1.8
Compound annual average growth, 2015 to 2020
© 2015 IHS
Indiana Forecast Summary
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Indiana Economic Outlook / April 2015
Key indicators
Percent change 2014 2015 2016 2017
Total employment 1.5 1.9 1.2 1.1
Unemployment rate (%) 5.9 5.8 5.5 5.6
Real personal Income 1.2 4.0 2.5 2.9
Real gross state product 2.1 2.7 2.4 2.4
Personal consumption
expenditures 3.5 2.5 4.6 4.6
Housing starts (Thousands) 17.6 18.2 21.2 24.7
Share of multi-family (%) 28.4 25.5 23.0 18.2
© 2015 IHS
Bottom line for the Indiana economy
• Near-term economic growth will continue to be favorable.
• Manufacturing, especially related to the transportation sector, has
spurred Indiana’s economic recovery over the past five years.
• Manufacturing provides 17% of state’s payroll jobs, first in the nation.
• National average is 9%.
• Sales of cars and light trucks a huge factor; demand from oil and gas industry
for steel pipe, machinery, etc., has also helped.
• Domestic demand maturing, strong dollar reduces competitiveness.
• Expanding service employment is key to long-run economic growth.
• High-tech area is where value is being added.
• Requires ongoing investment in education, R&D, infrastructure.
• Long-term slow population growth a potential drag on economy.
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Indiana Economic Outlook / April 2015
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