Gary forecast 2023

Micah Pollak, Ph.D.

Associate Professor of Economics and Director, Center for Economic Education & Research, School of Business and Economics, Indiana University Northwest

As Northwest Indiana, the rest of the state and the nation continue to emerge from the economic effects of the global coronavirus pandemic, attention has been focused on two significant and related challenges. The first challenge is accelerating inflation. During the first year of the pandemic, inflation in the United States slowed, due to reduced demand and partial lockdowns, to an annualized rate of 1.4%, a rate well below the 50-year historical average rate of 3.9%.¹ However, growth in prices has been accelerating rapidly since then, with annualized inflation of 7.9% since the first quarter of 2021 (2021 Q1 to 2022 Q3) and as high as 8.7% during the most recent three quarters (2022 Q1 to 2022 Q3). This rapid inflation, especially among energy and gasoline prices, has created challenges for both households and businesses.

The second challenge is often called the “Great Reassessment of Labor,” which refers to substantial and likely long-lasting changes in the labor market. During the early months of the pandemic, between February and April of 2020, the national unemployment rate jumped from 3.5% to 14.7%.² Since then, the unemployment rate has fallen rapidly before returning to a historical low of between 3.5% and 4.0%, where it has held for the last year. This sustained low unemployment rate, combined with a shrinking labor force as workers “reassess” their decision to work and the type of work they are willing to do, has resulted in high cost of labor, which has been beneficial for households but a challenge for businesses. While these two challenges are national or even global, their effects are felt regionally in Northwest Indiana as households and businesses struggle to adapt and respond.

High inflation driven by energy prices

In the Chicago Metropolitan Area, which includes Northwest Indiana,³ inflation has generally followed the national trend with lower-than-typical inflation during 2020 offset by higher-than-typical inflation since. While prices have risen dramatically in the last 18 months, inflation over the entire three-year period spanning the pandemic has been 4.8% per year.⁴ In addition, inflation during this period was driven predominantly by rising energy prices (+16.7% per year), specifically by higher utility gas service prices (+32.4% per year) and motor fuel prices (+14.1% per year). Excluding energy, prices rose 4.0% per year between 2019 and 2022, which is only somewhat higher than the long-term average annualized inflation rate of 3.4% (from 1977 to 2019) for the region.

Growth in pay in Northwest Indiana exceeds inflation

Even with a higher-than-typical annualized inflation rate of 4.8% since 2019, earnings in Northwest Indiana have not only kept pace but exceeded the rise in prices with average earnings rising 6.7% per year since 2019.⁵ Compared with 2019, the purchasing power of worker earnings in Northwest Indiana has risen by 1.7% per year after adjusting for inflation. This contrasts with the state of Indiana, where purchasing power has declined by 1.7% over the same period, and nationally, where purchasing power fell by 0.5%. In addition, much of this real growth in wages has been concentrated in traditionally lower income, service-sector jobs, such as food service and retail trade. This has significantly reduced poverty and helped alleviate some income inequality. However, rising energy costs, particularly retail gasoline, has a disproportionate effect on low-income households. Figure 1 shows the growth rate for all items and individual components of the Consumer Price Index (CPI) in the Chicago Metropolitan Area, as well as the growth rate in average annual earnings for Northwest Indiana. Growth in average annual earnings has exceeded the rise in prices of all items as measured by the CPI, as well as all major components within the CPI, except for energy and transportation.

Figure 1: Components of inflation for the Chicago Metropolitan Area and wage growth for Northwest Indiana

* Earnings are measured for the Gary Metropolitan Area.
Note: The inflation rate is measured from 2019 Q3 to 2022 Q3.
Source: U.S. Bureau of Labor Statistics, Consumer Price Index (CPI) for All Urban Consumers in Chicago-Naperville-Elgin, IL-IN-WI; U.S. Bureau of Labor Statistics, Current Employment Statistics (CES)

One of the reasons Northwest Indiana has fared better than the rest of the state with growth in real earnings is that employment in the region is concentrated in industries for which earnings are rising quickly, such as manufacturing; retail trade; wholesale trade; and accommodation and food services. These industries have seen significant growth in wages due to a combination of direct effects from the pandemic and indirect effects from the “Great Reassessment of Labor.” Table 1 shows the growth in average annual pay in select industries for Northwest Indiana during the most recent 12-month period for which data are available (2021 Q1 to 2022 Q1) compared with the rest of the state.

With some exceptions (such as manufacturing, utilities and construction), many of the industries shown in Table 1 are typically lower-paying service industries. Typically, Northwest Indiana’s higher concentration of employment in these industries has held back growth in pay. But during the years of the pandemic, these industries, which generally overlap with the definition of “essential workers,” have seen major increases in pay. This has benefited Northwest Indiana more relative to the rest of the state.

Most competitive labor market in decades

Early in the pandemic, consistent with the national trend, the unemployment rate for Northwest Indiana rose to a record high of 19.2% (April 2020).⁶ Since then, the unemployment rate has plummeted to well below the typical level, falling to a record low of 7,798 persons unemployed and an unemployment rate of 2.4% for Northwest Indiana in December 2021. Since then, both have remained below the historical average level. While increasing consumer demand for services is one factor contributing to this low unemployment rate, the more significant factor is a decline in the labor force.

Between 2010 and 2019, the labor force in Northwest Indiana grew at an average rate of 0.2% per year, significantly slower than the state average growth of 0.8% per year. Since the pandemic hit (September 2019 to September 2022), roughly 8,900 workers have exited the labor force in Northwest Indiana, a decline of 2.6%. In contrast, the labor force statewide is down only 0.4%. Today, as employment expands, Northwest Indiana is faced with meeting the increasing demand for workers with the smallest labor force in over a decade.

Interest rates returning to historically normal levels

In March 2022, the Federal Reserve began raising the federal funds rate to combat inflation. As of November, the effective federal funds rate has risen to 3.83%,⁷ or the highest level since 2008. While this is the highest rate in recent history, that is primarily a reflection of the Federal Reserve maintaining a historically low target window of 0% to 0.25% since the financial crisis of 2008. The current rate of 3.83% is still well below the pre-2008 historical average of 5.69% (1954 to 2007). However, the interest rate is higher than recently typical and will likely continue to rise. This adds an additional challenge for workers, by affecting housing markets and investment decisions.

Effect on firms

The growth over the last few years in real earnings for workers in Northwest Indiana has been beneficial for households but has also created a challenge for firms that are seeing their costs rise with inflation on all fronts. There continue to be significant global supply chain disruptions which affect Northwest Indiana directly as a manufacturing hub and indirectly as a major transportation and logistics hub. As firms shift to more on-shoring of production, this adds additional cost pressure from more expensive American labor. The higher pay for workers is also combined with changes in the preferences of workers, as many are now seeking jobs which provide greater flexibility in schedule and environment (such as remote work), as well as benefits that go beyond wage (such as childcare and eldercare benefits). Finally, these labor challenges are coupled with rapidly rising energy costs and a higher cost of borrowing.

The result is an extremely challenging environment for firms, in which traditional responses such as cutting wages or raising prices may not work. Instead, to successfully navigate these economic shifts, firms will need to find creative ways to address both labor challenges, such as greater automation and innovation to increase productivity. Despite these challenges, there have been some notable successes. For example, while the steel industry is often a source of significant uncertainty in Northwest Indiana, it has been a source of stability for the region since the acquisition of Arcellor Mittal by Cleveland-Cliffs in 2020. In 2021, Indiana was the single largest steel-producing state, producing 27% of all raw steel in the United States. This was as much as the next five largest steel-producing states combined.⁸

Forecast for 2023

While Northwest Indiana has faced substantial economic upheaval in the last few years and uncertainty surrounding inflation and the labor market in the coming years, the forecast for Northwest Indiana in 2023 is relatively strong. Efforts by the Federal Reserve to fight inflation through higher interest rates and further unwinding of quantitative easing are likely to be successful and we may see the federal funds rate stabilize in the first few quarters of 2023. Likewise, as firms and households continue to adapt and adjust to the expectations of workers following the “Great Reassessment of Labor,” we will see the labor force stabilize and firms will find ways to accomplish more with fewer workers. For the next few years, it is likely we will see a continuation of historically low unemployment rates and higher incomes, as well as a more worker-friendly labor market, perhaps at the expense of firms. Table 2 provides a forecast of key economic variables for the coming year.

Northwest Indiana is grounded in industries that have recovered quickly from the economic crisis caused by the pandemic. Despite national concerns over a potential recession, the forecast for the coming year in Northwest Indiana is economic growth which will at least keep pace with inflation. The most significant long-term challenge the region faces is not from inflation, but from a declining labor force, and we need to continue to expand efforts to educate our population and attract and retain educated and skilled workers.