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The IBR is a publication of the Indiana Business Research Center at IU's Kelley School of Business

Indiana

Indiana Business Research Center, Kelley School of Business, Indiana University

With the end of 2006 in sight, the year is shaping up to be one of even tamer growth than we predicted a year ago. As shown in Figure 1, Indiana’s total nonfarm payroll employment in 2006 has continued its relatively steady climb that began in July 2003. As of September 2006, nonfarm payrolls accounted for 2,980,200 Indiana jobs. This level is barely 1 percent below the state’s all‑time employment peak reached in May 2000, and it’s almost 100,000 jobs higher than the post-recession low of three years ago.

Figure 1
Indiana’s Monthly Nonfarm Employment and Unemployment Rate

Figure 1

Employment

Employment growth began the year at a fairly slow pace of about 20,000 new jobs annually compared to a year earlier. Then the pace picked up to a year-over-year rate of about 25,000 to 30,000 new jobs during the summer, but it slowed substantially in September. This continues a trend of decelerating job growth over the past two years, but at least we’re still adding jobs in most months.

Indiana’s modest job growth has been shared across most industries. The sectors with the largest contributions to new jobs over the past twelve months have been education and health services (averaging 6,742 new jobs year-over-year); leisure and hospitality (4,718 jobs); trade, transportation, and utilities (3,742 jobs); professional and business services (3,017 jobs); and construction (2,917 jobs).

The traditional bastion of the Hoosier economy, manufacturing, averaged an annual growth rate of only 383 jobs over the past twelve months, and overall factory employment has not budged much for the past two years. Even with this slow growth, however, Indiana is still the nation’s most manufacturing-intensive state with respect to employment, which accounted for 19.1 percent of all payroll jobs in September.

The overall pattern evident in Indiana employment this year is neither strongly encouraging nor discouraging. Most sectors are experiencing slow growth, with a bit more momentum evident in the trends for health care and education, professional and business services, and leisure and hospitality. The government, manufacturing, and information sectors’ employment, meanwhile, remains relatively flat on average. Finally, there has been some recent acceleration in the financial activities sector that bears watching.

Indiana’s unemployment rate in 2006 continued to meander in the general range of 5 percent, as it has for several years. However, the unemployment rate has declined over the last few months, and the number of people unemployed has dropped by nearly 30,000 since July to 153,550.

Other Indicators

A state’s economic health is measured by more than just jobs. Growth in Indiana’s gross state product (1) (GSP, the broadest measure of total output of a state’s economy) was 1.3 percent last year, compared to 3.6 percent for the nation. Only fives states had slower growth in GSP in 2005. The size of Indiana’s economy now ranks sixteenth nationally, overtaken last year by Maryland.

Preliminary data from the Bureau of Economic Analysis (BEA) indicate that, interestingly, manufacturing was a major contributor to Indiana’s year-over-year GSP growth. Continued improvements in manufacturing productivity help Hoosier factories produce more output without having to hire many more workers. Only seven states in 2005 had higher output than Indiana in total manufacturing, and only four states in durable goods manufacturing.

Indiana’s per capita personal income, which reflects individual earnings from all sources, slipped nearly a percentage point last year to 90.3 percent of the national average, below thirty-four other states. While total income of Hoosiers is growing in the aggregate, Indiana has not grown as fast as other states on a per capita basis. Early figures for personal income in the first half of 2006, however, indicate that Indiana’s performance relative to other states may be improving slightly.

Finally, the elimination of Indiana’s major budget deficit and generation of a surplus has enabled the state to put funds back into a wide range of neglected programs. This government spending in turn represents a stimulus to economic activity in many areas.

Indiana’s Outlook for 2007

Indiana’s economy should grow modestly in 2007, but there are challenges to this forecast. The domestic automobile industry is cutting back production, which will reduce demand for the goods and services of many Indiana firms. However, as supplier firms strive to broaden their customer base, they may be able to lessen the impact of the Big Three’s cutbacks.

Indiana’s housing market has not yet experienced the shock of falling prices and weakening demand that has hit some other parts of the nation, just as home prices here generally have not appreciated nearly as much as in those regions. As a result, Indiana isn’t likely to see a major downturn in the housing market, which drives much of the other activity in the economy. The pace of new home construction in Indiana, however, will likely slow down a bit in the year ahead.

The construction sector appears poised to grow at a faster pace next year as work on several fronts kicks into gear. New construction planned for the Major Moves transportation program is scheduled to rise significantly in 2007, which could stimulate thousands of new jobs throughout the state. Construction should also get under way on several major new plant locations or expansions that have been announced, involving several thousand additional jobs.

Some specialized industries have shown strong signs of vitality in recent months and are likely to fare well in the coming year. These include life sciences firms and biofuels production and research, among others.

Major risks to the state outlook are not overly troubling, although the economy may be hit by curve balls from any direction. Energy costs are not expected to rise greatly, and consumers have become somewhat used to gasoline prices well over $2 per gallon. As long as we don’t see a sudden large jump, consumers will likely maintain a fair level of discretionary spending. But unexpected shocks to the economy could dampen this outlook with little notice.

In conclusion, Indiana should gain about 20,000 to 25,000 jobs in 2007, and the state’s unemployment rate should remain about where it is, in line with the expectation nationally. Manufacturing jobs are not likely to grow substantially in 2007, which will be a year of preparation for stronger manufacturing growth ahead. The sectors likely to account for much of the expected job growth are health and education services, construction, trade and transportation, and leisure and hospitality. In addition, the state’s per capita personal income should level off or improve slightly as a percentage of the national figure.