Indiana’s outlook for 2022

Ryan Brewer, Ph.D.

Associate Professor of Finance, Division of Business, IUPUC

Timothy F. Slaper, Ph.D.

Co-Director, Indiana Business Research Center, Indiana University Kelley School of Business

Quotes and quips about forecast risks, uncertainty and the unprecedented economic conditions would not do justice to the uncharted terrain where the U.S. and Indiana economies find themselves.

Turn on the radio or peruse a news outlet, and it would seem that each day brings another type of economic fallout resulting from the COVID-19 pandemic.

This doesn’t mean that all is lost, but it does make it a challenge to know how to prioritize the economic risks and potential threats. We’ll begin with the challenges and close with the better news, namely, we do foresee modest growth in the coming year.

Challenges

The following are likely the most concerning economic forces:

• Supply chain disruptions leading to too few goods on the shelves and resulting supply-shock price increases

• Labor shortages aggravating supply shortages, transportation bottlenecks and increasing production cost pressures

• Lower labor force participation, together with relatively low population growth, in Indiana constraining overall economic growth

• Labor market mismatch as employers seek candidates and skill sets that returning and new-entry workers do not have

• Slow reawakening by small businesses that do not have the financial resources and cushion to risk reopening in uncertain times

• Inflationary pressures resulting from too much money (fueled by ham-fisted federal stimulus responses) chasing too few goods

• Relative price adjustments complicating household budget/spending priorities across housing, energy, food and other necessities

• Pent-up demand for travel, leisure and hospitality constrained by labor and capacity and ongoing fears of health and safety given new COVID-19 variants

• Women and Black Hoosiers experiencing greater-than-average job losses in Indiana, threatening the financial security of households

• COVID-19 variants continuing to spread worldwide, especially among trading partners and, thus, exacerbating global supply chain constraints

At the heart of our current economic challenge set lies the ongoing COVID-19 pandemic, replete with its cadre of threats, realities, fears and unknowns. For example, one way the virus continues to hamper the prospects for output in Indiana is through its impact within the trucking industry. The Commercial Carrier Journal reports that we have a shortage of 80,000 truck drivers across the country, leaving manufacturing-oriented states like Indiana in the middle of the supply chain bottleneck.¹ With aging truck drivers and early retirements fostered by COVID-19, as well as logistics interruptions for shipping, the problem is only amplified. In spite of the virus, we have come a long way from one year ago, a time when we had neither vaccines nor vaccinated people. Now, we have both.

COVID consequences

That said, increasing rates of vaccinations throughout the world and the broad acceptance of COVID-19 protocols, such as using masks and other personal health protection measures, have created a workable new-and-hopefully-temporary normal. While there will be the occasional household quarantine, across-the-board shutdowns appear to be an erstwhile strategy. Over time, we can expect that the currently seen economic vertigo in the economy will work itself out and we will return to the relatively mundane quandary arising from the fusion of monetary stimulus, fiscal actions, consumer demand, savings rates, technology and the like. Until then, however, we will continue to experience economic turbulence born from COVID-19, and Indiana is no exception.

Indiana has not fared as well as the nation as a whole on the vaccination front. As of this writing, 50% of Hoosiers have been fully vaccinated. To place this in perspective, 58% of Americans have been fully vaccinated, and we lag all neighboring states in this way (see Table 1).

Most sectors of the Indiana economy are trending toward recovery, which raises the following questions. Which type of household will continue unscathed, and which type of household will continue to bear the lingering effects of COVID-19 and its economic ripple effects in the coming year? The lingering effects will not be felt equally. One group that has been affected disproportionately is women, who have left the workforce in higher numbers, and now have the lowest labor force participation rate since the 1980s.² Women also disproportionately struggle with higher household expenses, and have experienced challenges with child care accommodations during the pandemic. Also, Black Hoosiers have been left behind in the wake of the pandemic. While 9.4% of the workforce in Indiana identify as Black, this group represents 17.7% of unemployment claims since March 2020.³ As for the entire economy of the state of Indiana, will economic performance match, surpass or lag the nation as a whole?

2020 saw unprecedented plummets and spikes in both employment and income as the economy was shut down and then erratically reopened along with enormous federal stimulus. The recovery since mid-2020 has been sizable but remains incomplete. Much like the experience in late 2020 and early 2021, the recovery looks to be bumpy. Along with supply chain disruptions, a sticky loss of labor force participation has attenuated recovery, provided justification for the continuation of stimulus and lowered job creation rate expectations.

Jobs and the labor force

Our current forecast has job creation continuing to exceed its pre-pandemic level through the end of next year. Employment growth over that six-quarter period is enough to restore employment to its 2019 fourth-quarter peak. That said, Indiana employment is still about 60,000 below our forecasts before the pandemic. That is, we believe 60,000 workers in Indiana have dropped out of the labor force, beyond previously anticipated unemployment and retirement expectations. This shortfall in the workforce mirrors the U.S., which has lost about 4.3 million workers from 2019 levels—about half attributable to a loss of labor force and half to unemployment. Indiana has been affected in this way somewhat less severely than at the national level—Indiana has lost about 2.0% of its workforce vs. 2.3% for the U.S.

Last winter, we thought that slack in the labor market would provide opportunities for growth in 2021, but Indiana along with the rest of the country has reported labor shortages—a reversal of expectations.

We hope to see the workforce recover in Indiana by the end of 2022, and yet many factors will affect the recovery, including stimulus, supply chain restoration, labor participation rates, and continued demand for goods and services.

There are several salient features on the employment front.

• First, growth does not return to long-term, pre-pandemic levels until close to the end of our forecast period, except for construction. Construction was abnormally high before the pandemic and was less severely affected during the lockdown period.

• Second, neither long-term trends nor the pandemic shock have been kind to manufacturing. We expect a brief supply-chain recovery—a six-to-nine-month bounce back. But over the longer run, manufacturing employment is expected to lose buoyancy—which has been the norm for the sector for most of the past half-century across the U.S.

• Third, most job gains will be in services.

Wages

Across a wide spectrum of sectors and industries, employers are desperate for workers. Given the recent national debate about setting the national minimum wage at $15 an hour by statute, seeing $15 starting wages advertised at fast-food restaurants in a lower cost-of-living state like Indiana is startling. One can hope that those higher wages will lure potential workers off the sidelines and into the labor force—and that those higher wages will not ignite a dumpster fire of inflation.

Wage changes are expected to continue to be influenced by government intervention (see Table 2), which will lead to further labor interstate supply-demand changes in population centers near Indiana state lines, likely affecting labor markets in Gary, South Bend, Angola, Fort Wayne, Richmond, Madison, New Albany, Evansville, Jasper and Terre Haute.

Income growth in Indiana has consistently fallen short of the national level. Over the 2013-19 period, this shortfall was 0.3%. This pattern continued during the lockdown period in the first half of 2020 when income growth was very strong due to massive federal income supplements. Following that, when those stimulus income supplements tapered off, income growth weakened. Given the dominant driver of income has, at the same time, one foot on the accelerator and the other on the brake, the passengers are getting whiplash. In our forecast, the historical pattern reasserts itself. Over the forecast time horizon, we expect the Indiana deficit to be 0.4%, in keeping with the state’s more recent trends vis-à-vis the nation.

Unemployment

The unemployment rate in Indiana has been below the U.S. rate since 2014. Following the unprecedented spike in the second quarter of 2020 when all bets were off, the Indiana unemployment rate has reestablished its position as lower than the national rate. While Indiana’s current unemployment rate of 4.0% can be thought of as a low rate relative to much of history, and even as the labor market remains tight throughout the Indiana economy, we are certainly not at full employment yet.

We expect Indiana’s unemployment rate to remain lower than the U.S. for the remainder of the forecast period (through 2024). This assumes we do not experience continued levels of high inflation and shipping bottlenecks, which might stifle demand for consumer goods, thus threatening manufacturing employment in Indiana.⁴

Unemployment rate and COVID-19

The initial economic shock from COVID-19’s interference hit hardest beginning in April 2020, when the reported unemployment rate in Indiana peaked at 16.9%. At the time, most believed the pandemic would produce a temporary shock affecting various parts of the economy, including a spike in unemployment due to the government-mandated shutdowns. In that initial aftermath to the shutdowns, back in April 2020, among Indiana’s peer states, only Michigan’s unemployment rate fared worse (at 23.6%), with Kentucky, Illinois and Ohio faring similarly to Indiana, at 16.9%, 16.5% and 16.4%, respectively.

See Table 3 below to consider the unemployment rate in Indiana, its four proximal neighbors and five manufacturing competitors throughout the country. Only Wisconsin boasts a lower rate, presently.

Indiana supply chain—experience and vulnerabilities

The pandemic has overburdened an already-thin labor force in the trucking industry. With vaccine mandates and the virus itself, the industry has experienced significant numbers of retirements and other labor force dropouts. Because over 71% of goods shipped throughout the country are shipped by truck, the shortage of drivers is accelerating supply chain bottlenecks.⁵ The freight demand has continued to challenge the remaining available drivers, causing wage inflation in the trucking industry, asserting more power for drivers, who may drive less and rest more, thereby shipping fewer goods, causing more supply chain bottlenecks.⁶ Because Indiana relies upon trucking to conduct its business as a manufacturing leader, this adds additional headwinds to growth.

Conclusion

In total, we project state economic growth a shave less than the national middling rate of growth of about 2.2%. Indiana’s growth will likely end up a sliver less than the national rate because the Hoosier economy is more manufacturing intensive. The production of goods in Indiana has been slowed by supply chain disruptions, which threaten to continue well into 2022 (or 2023 if the FreightWaves.com prognosis is accurate). Indiana should be better positioned for faster growth toward the end of 2022, once various inefficiencies have worked their way back to relatively normal conditions.

Is our outlook for Indiana optimistic or pessimistic? It depends on one’s point of reference.

On the positive side, we expect the post-pandemic recovery to continue with solid growth in employment and income. On the pessimistic side, the growth we expect in employment still leaves the state level of employment significantly below the expected level before the pandemic. Not to put too sharp a point on it, but for both employment and income, forecast growth falls short of what we expect at the national level.

Since the first quarter of 2020, the economy has been anything but predictable. We’ve experienced declines of more than 30% and growth exceeding 30%. Currently, we have 60,000 displaced workers in Indiana alongside inflationary pressures not seen in 40 years. The current supply chain structure, which is built upon international trade important to Indiana’s economy, is experiencing unprecedented bottlenecks on a grand scale. While we believe that, ultimately, Indiana will end up with slightly positive output in 2022, we don’t expect our economy to stabilize until the latter half of 2022. By the end of 2022, we expect labor markets will have recovered, supply chain issues will have had time to resolve, and the pandemic responsible for all the recent economic turbulence will have had another year to work itself out.