93 years of economic insights for Indiana

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

Gary forecast 2018

Image

Assistant Professor of Economics, Judd Leighton School of Business and Economics, Indiana University Northwest

The value of Northwest Indiana’s economy1 in the third quarter of 2017 was estimated at $29.99 billion,2 or 1.6 percent larger than one year ago. Despite this growth, the economy of Northwest Indiana (NWI) expanded slower than the state of Indiana (3.6 percent growth) and the United States (4.1 percent growth). When adjusting for inflation, NWI’s economic output fell by about $190 million in year-2015 dollars over the previous year.

A common measure of economic prosperity is real GDP per capita, or the average annual income/output per person adjusted for inflation. Using this measure, the average resident of Northwest Indiana saw their real annual income fall by $553 (-1.3 percent) during the last year. This decline is in contrast to a $396 increase for the average Hoosier and a $492 increase for the average American over the same period (see Table 1).

Table 1: Measures of economic growth, 2016 Q3 to 2017 Q3

Northwest Indiana State of Indiana United States
GMP/GDP
(billions of current dollars)
$0.46
(1.6%)
$12
(3.6%)
$766
(4.1%)
Real GMP/GDP
(billions of year-2015 dollars)
-$0.19
(-0.7%)
$4
(1.1%)
$334
(2.2%)
Real GMP/GDP per capita
(year-2015 dollars per person)
-$553
(-1.3%)
$396
(0.9%)
$492
(0.9%)

Source: Northwest Indiana Imputed Gross Metropolitan Product (GMP) from the School of Business and Economics at Indiana University Northwest and GDP (U.S. and state) from the U.S. Bureau of Economic Analysis

This lack of real growth in income for Northwest Indiana residents may be surprising considering that over the same period the unemployment rate for the region fell from 5.9 percent to 5.3 percent, and total employment remained stable.3 This decrease in real income for Northwest Indiana is not being driven by lack of jobs, but rather an ongoing structural change in the type of jobs available, in addition to population changes.

Employment and population trends in Northwest Indiana

Looking at Figure 1, we can see the total change in employment for Northwest Indiana since 2012, separated into goods-producing and service-providing sectors. While total employment has remained essentially the same, the composition has changed significantly. Since the third quarter of 2012, Northwest Indiana has lost 6,200 jobs in goods-producing sectors, such as manufacturing and construction, which are generally high-paying (with an average income of $80,000 per year) and with good benefits. This decline was offset, at least in numbers, by the addition of 5,600 jobs in service-providing sectors, which are generally lower-paying (with an average income of $39,000 per year) and with limited benefits. The fastest-growing service-providing industries in Northwest Indiana were ambulatory health services (with an average annual income of $55,000), food service and drinking places (with an average annual income of $13,300) and general merchandise stores (with an average annual income of $18,250).

Figure 1: Total change in NWI employment since 2012 by sector type

graph

Source: Quarterly Census of Employment and Wages (QCEW) data from the U.S. Bureau of Labor Statistics

The trend toward fewer goods-producing and more service-providing jobs in Northwest Indiana continued during the last year and is part of a national shift toward a more service-based economy in the United States since the 1960s. The increasing importance of service-based jobs by itself is not responsible for the decrease in real income. Indeed, in recent years the number of service-providing jobs has been growing for both the state of Indiana and nationally as the knowledge economy expands, and average real income per person has risen significantly.

The challenge Northwest Indiana is facing is that growth in service-providing jobs has been mainly driven by lower-paying industries, such as food service or retail trade, with the notable exception of the health care industry. Northwest Indiana has a long history in manufacturing, which was once the lifeblood of the region. Unfortunately, as technology changes the number and nature of these jobs, simply attracting more goods-producing jobs is no longer a long-term solution.

Increased productivity and automation will continue to reduce the number of jobs in manufacturing nationally and in Northwest Indiana. This is most apparent in the steel industry, which is still an integral part of the Northwest Indiana economy. Today, the state of Indiana produces 34 percent more steel than it did in 1990, but does so with 33 percent fewer workers.4 While attracting jobs in steel and other manufacturing industries will always be beneficial for the region, any successful long-term economic policy must look beyond goods-producing jobs and focus on the growing knowledge economy.

In addition to the national structural shift from goods-producing jobs to service-providing jobs, there is also a regional trend in population contributing to the lack of high-paying service-providing jobs and the decline in real income per person in Northwest Indiana. Table 2 shows the average annual population growth rates from 2000 to 2015 for Northwest Indiana and the United States by several age groups. In each age group, population in Northwest Indiana grew significantly slower than both the state and the nation.

Table 2: Annual population growth rates by age groups, 2000 to 2015

  (1) Northwest Indiana (2) State of Indiana (3) United States (1) minus (3)
Total 0.9% 1.6% 2.4% -1.5
19 and younger -0.9% 0.2% 0.6% -1.5
20 to 24 years 0.9% 2.1% 3.5% -2.6
25 to 44 years -1.8% -1.5% -0.5% -1.3
45 to 54 years 0.7% 2.1% 3.2% -2.4
55 to 64 years 9.3% 9.4% 10.3% -1.0
65 and older 3.4% 3.9% 5.0% -1.5

Note: Numbers in this table may not sum due to rounding.
Source: U.S. Census Bureau decennial census and the American Community Survey

The two population age groups that have grown the slowest relative to the U.S. average are those ages 20 to 24 years old (which grew 2.6 percentage points slower than the nation) and those ages 45 to 54 years old (which grew 2.4 percentage points slower than the nation). These two age groups are important because they represent a population that plays a key role in the economic growth of a region. Those ages 20 to 24 years old represent the next generation: college-aged individuals at the beginning of their careers, that are more likely to be well educated, highly mobile and looking for somewhere to raise kids. Those ages 45-54 years old represent individuals at the peak of their life-cycle earnings, most likely to have extensive education and experience.

These two age groups are both likely to have high human capital and, together, are fundamental in establishing a strong workforce capable of attracting high-paying knowledge-economy jobs. Without addressing the reasons why these age groups are leaving Northwest Indiana, efforts to improve the education and training of the workforce will be far less effective.

Without a concentrated effort to stem the outflow of human capital, train workers for careers in the knowledge economy and focus on attracting higher-paying service-providing jobs (like those in fields such as accounting, finance, computer systems, design, consulting, management, advertising, public relations, etc.), this trend of weak economic growth for Northwest Indiana will likely continue.

Forecast for 2018

Despite these challenges, the 2018 forecast for the economy of Northwest Indiana is positive, with expected growth of 1.1 percent in the next year. This forecast is based on trends in the Northwest Indiana Coincident Index,5 coupled with several positive leading economic indicators.

In the last year, steel production in Indiana has risen by 8.6 percent, the U.S. Manufacturing Index has risen 18 percent, the Dow Jones Transportation Index rose 22.4 percent, U.S. retail sales rose by 4.4 percent and U.S. leading indicators are up 4.0 percent. Table 3 provides the 2018 forecast, along with the 2017 forecasted and actual growth for comparison. This forecasted growth in 2018 for Northwest Indiana is expected to translate into regional employment expanding by 0.7 percent, or the creation of approximately 1,800 jobs, almost all of which will be in the service sector. Unfortunately, this forecasted rate of growth barely keeps pace with inflation and is likely to again be slower than the economic growth in 2018 for Indiana and the nation.

Table 3: Northwest Indiana regional forecasts

  2017 forecast 2017 actual 2018 forecast
Northwest Indiana Coincident Index5 +1.5% 1.4% +1.1%
Employment +0.5%
(+1,500 jobs)
+0.1%
(+300 jobs)
+0.7%
(+1,800 jobs)
Unemployment rate 5.2% 5.3% 4.5%
Gross metropolitan product (GMP) +$450 million +$460 million +$330 million

Source: Author’s calculations

Notes

  1. Defined as the counties of Lake, Newton, Porter and Jasper.
  2. Northwest Indiana Imputed Gross Metropolitan Product (GMP), School of Business and Economics, Indiana University Northwest, http://go.iu.edu/nwi.
  3. Based on Quarterly Census of Employment and Wages (QCEW) data for 2012-2017 from the U.S. Bureau of Labor Statistics.
  4. U.S. Geological Survey, Minerals Yearbook and Historical Statistics for Mineral and Material Commodities.
  5. Northwest Indiana Coincident Index and Forecast, School of Business and Economics, Indiana University Northwest, http://go.iu.edu/nwi.