Columbus forecast 2017
Assistant Professor of Finance, Indiana University Division of Business, Indiana University–Purdue University Columbus
Gross domestic product (GDP) in Columbus is growing for a seventh consecutive year, though the rate of expansion over the past three years has been less than the expansion seen across the rest of Indiana taken together. Indicators relevant to the local economy suggest further economic expansion is unlikely, yet Columbus is poised to continue at or near full employment. It also has the lowest unemployment rate and best average wages relative to its peers.
Some of the metrics on track to continued strength in 2017 include GDP, employment, labor force and wages.1 Also, per capita income in 2014 (the latest data available at the time of this article's writing) was up 2.6 percent in the Columbus Metropolitan Statistical Area (MSA), which consists of Bartholomew County.2 However, the Columbus Area Stock Index (CASI) has experienced volatility recently—down more than 10 percent in the last two years. Cummins forecasts continue to show weakness, the automotive sector may be nearing the end of its expansion, and local building permits and tightened labor markets suggest growth into 2017 will be challenging.
Measures of concurrent economic vitality
Unemployment: With a current unemployment rate of just above 3 percent, Columbus has one of the most industrious labor forces anywhere in Indiana and the United States, placing upward wage pressure on employers who seek to expand business in Columbus. Businesses around the Columbus metro are now struggling with a deficit of available employees during the holiday retail season, when employment opportunities for service jobs tend to peak. Local area weekly wages have risen by about 25 percent over the past seven years, from roughly $800 in 2009 to over $1,000 in 2016 (see Figure 1).
Figure 1: Average weekly wages and the unemployment rate in the Columbus MSA
Source: U.S. Bureau of Labor Statistics
While unemployment rates across America and Indiana have continued to trend downward over the past year, the rate for Columbus continues to reflect the least slack relative to comparison regions. Furthermore, the rate has stabilized across most regions analyzed. See Table 1 for unemployment rates among selected Indiana metros and micros.
Table 1: September unemployment rate comparison for selected Indiana metros and micros
Note: Data are not seasonally adjusted.
Source: U.S. Bureau of Labor Statistics and Indiana Department of Workforce Development
Employment and labor force: One telling aspect of the net positive growth Columbus has been experiencing over the past seven years is seen through the lens of jobs available to residents of the Columbus MSA. During this time, Columbus has produced about 12,000 jobs. In September 2016, Columbus-area employers provided 53,200 jobs to a local labor force of 45,114 (see Figure 2).3 These numbers are up from 52,100 and 43,700 in September 2015, respectively. This implies that Columbus employers provide a net 8,086 jobs to citizens outside of the Columbus MSA, placing upward demands on discretionary services during workdays, and leaving economic impact on the Columbus table. Job growth over the prior 12 months was 1,100 (2.1 percent), while labor force growth over the prior 12 months was 1,414 (3.2 percent).
Figure 2: Local jobs and local labor force
Source: U.S. Bureau of Labor Statistics and Indiana Department of Workforce Development
Job growth, wage growth, a skilled workforce and high-tech GDP growth have earned Columbus, Indiana, national recognition as the second-best small city overall in America for attracting additional capital investment.4 Between 2008 and 2014, various enterprises invested at least $145 million into the Columbus economy.5 Planned investments over those years exceed this amount, leaving additional promise for growth in the future, as planned investments are executed. For instance, in 2015, $156 million in planned investments were reported to the Columbus Economic Development Board, while in 2016, $71 million in additional capital investments had been announced through November 4 (see Table 2).6
Table 2: Columbus MSA planned business investment announcements since the Great Recession
|Investment ($ millions)||Number of employees|
Source: Columbus Economic Development Board
State leading index and consumer sentiment: These numbers relate to Indiana and the United States, respectively, yet they also impact Columbus—particularly since Columbus is dependent on capital investment (manufacturing) and consumer spending (transportation). Since 2009, both of these measures had been generally increasing through June 2016, indicating continued economic expansion (see Figure 3).
Figure 3: State leading index for Indiana and U.S. consumer sentiment
Sources: Philadelphia Federal Reserve Bank and the University of Michigan
Since the recovery began in earnest in January 2011, Indiana’s state leading index7 has averaged 1.78, measured monthly, while consumer sentiment8 has averaged 81.5 over the same period. Currently, the state leading index stands at 1.8 (down 18 percent from a year ago) and consumer sentiment stands at 91.2 (up 4.5 percent from 2015).
Purchasing Manager’s Index (PMI): In August 2016, the PMI measure came in at 49.4. A reading below 50 generally indicates that the manufacturing economy is contracting. However, the September and October readings were 51.5 and 51.9, respectively, suggesting that the manufacturing environment remains in expansion mode (see Table 3).
Table 3: Purchasing Manager’s Index
Note: Values above 50 generally indicate that the manufacturing economy is expanding, while values below 50 indicate contraction.
Source: Institute for Supply Management
Yield curve: The yield curve for U.S. treasuries remains in normal form. Short-term rates remain near zero, while 30-year securities continue to hover around 2.5 percent as of November 4, 2016.9 Inflationary threats from wage increases are now considered as the Federal Reserve Board continues to debate the decision to increase short-term rates in December.
Local building permits: In 2009, in the wake of the Great Recession, 125 residential building permits were filed in Bartholomew County.10 Following years saw increases in the number of residential building permit filings. Measured by fiscal years (October through September of each year), building permit applications have begun to show inconsistent growth (see Figure 4). In particular, Columbus saw a 23 percent decline in permits between the 2015 and 2016 fiscal years.
Figure 4: Local building permit trends for the Columbus MSA
Note: Data for each fiscal year reflect October to September data.
Source: U.S. Census Bureau
Residential housing sales: While the number of new building permits has declined in 2016, Figure 5 and Figure 6 illustrate that the residential real estate market has experienced a reduction of inventory, lower sales turnover and increased median sales prices (which largely is due to a sharper decrease in sales levels of lower-priced properties). While 2016 may have seen a slowing in residential real estate turnover, this market is likely to be affected—possibly catalyzed—by any increases in the target federal funds rate, which may compel on-the-fence buyers into action.
Figure 5: Columbus residential real estate sales turnover and inventories
Source: Berkshire Hathaway—Columbus, Indiana offices
Figure 6: Columbus average median house sales price
Note: This chart shows the median sales price, averaged for January to October of each year.
Source: Berkshire Hathaway—Columbus, Indiana offices
Local real GDP growth: Since the recession, chained GDP has risen in the Columbus MSA—from $3.98 billion in 2009 to the 2015 output of $5.23 billion.11 However, the rate of increase in GDP growth has slowed over the past three years (see Figure 7).
Figure 7: Real GDP growth over 10 years
Source: U.S. Bureau of Economic Analysis
While GDP has been increasing more slowly over the past decade in Columbus, an association between waning building permits preceding a decline in GDP can be seen in the 2006 to 2008 timeframe (see Figure 8). In 2005, the number of local building permits began to drop (hitting a low point in 2009). This trend was followed by an eventual drop in GDP a few years later. Will such a lagged association exist again between permits and GDP? Time will tell.
Figure 8: Real GDP and building permits in the Columbus MSA
Source: U.S. Bureau of Economic Analysis (chained GDP) and U.S. Census Bureau (building permits)
Columbus Area Stock Index (CASI): The composition of the Columbus economy may be reflected by an index of publicly traded securities relevant to the community. CASI was developed as a tool to keep abreast of the returns performance of securities affecting the local community, as well as a tool for forecasting local economic conditions. CASI is an economy-size-weighted index, which weights each component by the number of total jobs estimated to be produced and available in the Columbus MSA. Therefore, securities were selected using area employment as the basis for inclusion in the index. Not all sectors in the local economy were considered. Where the economic condition of a sector was estimated to change relative to some other independent sector, then the dependent sector was excluded.
Figure 9 shows a graphic of the major Columbus-area employment sectors, how they are interrelated, and to what extent each plays a role in the health and vitality of the local economy by providing jobs. Weights reflect the percentage of the core or base employment jobs available within the Columbus MSA. Support jobs are not included in this analysis. Thus, for instance, of the base jobs in the Columbus MSA, nearly two-thirds of them are in manufacturing.
Figure 9: CASI sectors included for the Columbus core economy
Source: Indiana University–Purdue University Columbus
It is estimated that manufacturing, retail (e.g., grocery and staples), consumer discretionary (e.g., restaurants, hotels, hospitality and tourism), and health care are the core, independent sectors in the Columbus economy. Remaining sectors—including finance, utilities, government, professional services and construction—were estimated to rise and fall according to the performance of the four independent sectors. Once the core sectors were identified, securities were then selected to represent active participation in the local economy. These securities were then weighted according to the estimated numbers of jobs filled by each organization or group (see Table 4).12
Table 4: Components of the Columbus Area Stock Index
|Health care (10.89% )||Vanguard ETF (healthcare)||10.89%||4.76||10.89|
|Consumer discretionary (10.44% )||Vanguard ETF (consumer discretion)||10.44%||4.57||10.44|
|Faurecia (private auto supply)||8.02%||3.51||8.02|
(proxy for other auto suppliers)
|Retail (13.72% )||Simon Property Group||3.43%||1.50||3.43|
Source: Indiana University–Purdue University Columbus
Where no individual security could be found, such as is the case for the health care and consumer discretionary sectors, Vanguard ETFs were selected to approximate local employer return performance. The index was then created using daily adjusted close prices from 2004 through 2016 and compared to the S&P 500 (daily adjusted close prices), which is a market capitalization value-weighted index.13 The S&P 500 daily adjusted close hit its low point on March 9, 2009. ^GSPC is an ETF reflecting the S&P 500, and its value on that date was 676.53. On that same date, the CASI was measured at 82.24, whereas the 10-year low was measured at 78.72 on November 20, 2008.
Since early January 2014, the S&P 500 has been up approximately 13.8 percent. Up 0.1 percent, CASI has essentially neither gained nor lost value during that time frame, yet has experienced considerable volatility over the period (see Figure 10). This is largely due to lagging performance in Cummins Inc. (CMI), which has lost about 14 percent of its value over that time. It dropped from about $145 per share to $87 in early January 2016, before making a strong recovery this year to about $125 per share as of November 4, 2016. This level of volatility and underperformance suggest caution to the Columbus economy going forward.
Figure 10: CASI and S&P 500 performance comparison
Source: Author’s calculations and Yahoo Finance
National and global considerations
National concerns: A primary concern going forward is the effect on the U.S. economy of the end of the low short-term federal funds rate. On September 13, 2012, the Federal Reserve voted 11-1 in favor of the third round of quantitative easing (QE), after which equity securities experienced a two-year bull market without interruption until October 2014, at the end of QE. Over that stretch, the S&P 500 gained 17.4 percent annualized returns, while CASI grew 20.1 percent annually. QE provided markets with a form of credit liquidity, not unlike the zero federal funds rate, which is expected to end in the coming year. During the aftermath of the Great Recession, the S&P 500 experienced volatility while American corporations built up working capital levels and were slow to hire workers—all of which was moderated by QE and the zero federal funds rate.
QE was terminated in October 2014, and since that time the S&P has been volatile as cash levels across Corporate America surged to nearly $2 trillion, even as CASI experienced even greater volatility and lost value. Questions exist going forward as to how equity values will respond in the absence of zero interest rates. Questions also exist going forward about what additional volatility in the equities markets will cause in American consumer confidence, spending and jobs. We have no experience as a country coming off QE or coming off a zero federal funds rate. We are entering uncharted waters.
Purchasing Manager’s Index: The August 2016 PMI report showed a reading of 49.4 percent, the lowest reading since May 2013, and suggests the manufacturing economy fell into contraction mode after 44 consecutive months of expansion. The PMI has been greater than 43.1 percent for 89 consecutive months, which indicates expansion of the overall U.S. economy.14
Global concerns: China continues to experience growth weakness, with reports of growth below 7 percent, ahead of their five-year economic planning meeting in 2017. Alongside continued weakness in Russia and western Europe, Brexit offers additional uncertainty moving forward. The overall U.S. unemployment rate is now 4.5 percent, the lowest in eight years. Continued implications for cheap commodities and oil may not be well understood, yet certainly many sectors have been harmed worldwide—including energy and mining—even as oil shows promise for a pricing recovery in 2017. These two sectors in particular have proven material in decelerating sales growth for Cummins in their high horsepower engine and power generation segments, largely overseas, through October 2016. Cummins has largely positioned itself for continued flat sales through 2017.
The Columbus, Indiana, economic outlook for 2017 is neutral to slightly negative. Continued growth is slightly overshadowed by suspicions that the economic expansion seen in Columbus over the last eight years may be facing headwinds.
Leading indicators: After a brief spell at 49.4 in August this year, the PMI returned to above 50, which implies continued manufacturing expansion. Also, Cummins stock has increased in value by over 45 percent since the beginning of 2016—a strong sign that the investing community has approved of actions taken to mitigate risk factors across its businesses. The yield curve remains in normal form. Finally, consumer sentiment (and spending) continues to buttress the economy with strength.
Additional planned investment: Locally, seven businesses announced plans for business expansions with infrastructure improvements amounting to more than $70 million, and some have stated modest future hiring in the area, with plans for about 40 new positions having been announced to the Columbus Economic Development Board.
Automotive industry: With an annualized sales rate of 17.9 million units as of October, U.S. cars and light truck sales are poised to continue near-record-level sales.15, 16 USA Today reports that light automotive sales are expected to grow through 2023, but Automotive News reports that 2017 is expected to be weaker than 2016 for light automotive sales.17 Thus, we project 2017 sales levels will be similar to 2016 levels. While the projection to hold at 2016 sales levels could be good news for Columbus, an expected industry decline could hinder capital investment or sustainable job growth in future periods. If the sales decline begins in 2017, this may impact the Columbus economy sooner.
Employment base: Columbus boasts the lowest unemployment rate among Indiana metros at 3.1 percent at the time of this writing. Also, wages have increased in the area and nationally. Furthermore, workers are increasingly hard to find, yet some workers may be re-entering the workforce as the local labor force increased by 3.2 percent this past year—outpacing new jobs in the region, which increased by 2.1 percent.
Leading indicators: Local building permits were down 23 percent for the 2016 fiscal year, off of a 2015 fiscal year high of 269 permits filed. The CASI, a stock index weighted to reflect the Columbus metro area, is trading 15 percent lower than the S&P 500 over the last 15 months—even as Cummins stock has recovered quite well in 2016.
Cummins: Cummins 2016 numbers to date have included sales drops in each of its business units.
- Power systems (-12.8 percent in Q3) lost business arising from weakness in international markets.
- The engine division was down 11.6 percent in Q3, arising from the natural industry cycle of medium and heavy truck sales in North America entering its low points in 2016 and 2017.
- Components (-7.8 percent in Q3) were also disaffected by losses in North American markets.
- Distribution dropped 3 percent in Q3 due to soft domestic markets and a strong dollar weakening revenues earned in acquisitions abroad.
Continued weakness in mining and lower demand for durable goods caused by a higher interest rate environment may exacerbate already soft North American heavy-duty engine and component sales going forward, which had been strong through mid-2015. Class 8 heavy-duty engines commonly seen in long-haul semi-trucks are expected to experience 10 percent drops in 2016 and 2017.18 Medium-duty truck engines and bus engines show signs of weakness, although to a lesser extent, with sales off 3 percent. Entry into light-duty trucks (Nissan Titan) provides additional opportunity for new markets for Cummins, yet with unproven financial economics. The Hedgehog project (Seymour, Indiana) also provides new opportunity for growth; yet again, any forecast for light-duty or Hedgehog would be unknown for now, until further sales data come in over the coming two or three quarters.
Multinational synergy: Weakness in economic growth persists throughout the world, which has altered growth opportunities for Cummins—particularly for high-horsepower engines and associated components, as well as power generation in developing economies. Also, the strong dollar may begin to affect other local manufacturing firms having global supply chains, either by reducing demand for international customers or cooling potential for acquiring new international markets.
With 45,000 people in its labor force plus access to 1.7 million in population within a 45-minute commute, Columbus could be positioned to experience another year of economic prosperity in 2017. However, due to complications arising from global weakness, automotive and class 8 engine sales moving toward lower levels, upward pressures on interest rates, struggles for Cummins in key businesses worldwide, increasing difficulty for new corporate prospects to find workers in the low unemployment environment and rising wages, Columbus is most likely to experience net flat job growth—or even slight contraction in 2017.
Columbus stands to continue to attract capital investment and people and retain its share of high-income jobs, but slow international economic growth and cooling North American markets may hamper opportunities for significant expansion. Growth in the manufacturing sector can be expected to persist going forward, particularly as short-term interest rates remain near zero, but changes to consumer borrowing costs in the coming year will likely yield a chilling effect on demand for the products built in the Columbus area.
Wage increases may lure additional workers back into the workforce, and yet eventually, this can have inflationary effects, which could inspire the Fed to raise rates, disenchanting consumers, which could ultimately signal the end of the business cycle. As is nearly always the case, since Columbus depends disproportionately on cyclical business patterns to fuel its GDP, this could be particularly sobering for Columbus in the coming three years.
- Taken from StatsAmerica’s USA Counties in Profile on November 6, 2016.
- U.S. Bureau of Economic Analysis data taken from www.stats.indiana.edu/bea/simple/pi.html on November 6, 2016. 2015 data were not yet released.
- U.S. Bureau of Labor Statistics data taken from www.stats.indiana.edu/laus/laus_view3.html on October 31, 2016.
- Milken Institute, “2014 Best-Performing Cities: Where America’s Jobs Are Created and Sustained,” January 2015, 33, https://milkeninstitute.org/reports/best-performing-cities-2014.
- Ryan Brewer, “Columbus Forecast 2015,” Indiana Business Review, Winter 2014, www.ibrc.indiana.edu/ibr/2014/outlook/columbus.html.
- Information taken from an interview with Jason Hester, Columbus Economic Development Board, November 3, 2016.
- State leading index data taken from the Federal Reserve Bank of Philadelphia website: www.philadelphiafed.org/research-and-data/regional-economy/indexes/leading/.
- Consumer sentiment data taken from the University of Michigan website: www.sca.isr.umich.edu/.
- U.S. Department of the Treasury data
- U.S. Census Bureau data from https://www.census.gov/construction/bps/.
- U.S. Bureau of Economic Analysis data taken on November 1, 2016
- Employment information for local employers was retrieved from the "Hoosiers by the Numbers" website on October 31, 2016: www.hoosierdata.in.gov/highlights/profile.asp?geo_val=S18;C005&page_id=6.
- Daily adjusted close prices were retrieved from www.yahoo.com/finance. Adjustments include stock splits and dividends over the period.
- Institute for Supply Management, “October 2016 Manufacturing ISM Report on Business,” November 1, 2016.
- Federal Reserve Bank of St. Louis, “Light Weight Vehicle Sales: Autos and Light Trucks,” accessed November 5, 2016, https://research.stlouisfed.org/fred2/series/ALTSALES.
- C. Groden, “U.S. Auto Sales at 10-Year High,” Fortune Magazine, October 1, 2015, http://fortune.com/2015/10/01/u-s-auto-sales-at-10-year-high/.
- C. Woodyard, “New Forecast: Auto Sales May Fall Short This Year,” USA Today, July 13, 2016, www.usatoday.com/story/money/cars/2016/07/13/revised-forecast-auto-sales-may-fall-short-year/87045182/, and A. Sawyers, "Forecasters See U.S. Sales Up this Year, but Softer 2017," Automotive News, January 10, 2016, www.autonews.com/article/20160110/RETAIL01/160119990/forecasters-see-u.s.-sales-up-this-year-but-softer-2017.
- Trucking News Staff, “Demand for Class 8 Trucks Down 10% in March; Medium-Duty Dips 3%,” Trucking News Online, April 21, 2016, www.truckingnewsonline.com/news/demand-for-class-8-trucks-down-10-in-march-medium-duty-dips-3/9461/.