U.S. economy continues to expand, but at a slower pace, reaching about 2 percent growth in 2020

Nov 7, 2019

4 min

INDIANAPOLIS -- The U.S. economy will continue to expand for a 12th consecutive year in 2020, but by only about 2 percent and struggling to remain at that level by year's end. Indiana's economic output will be more anemic, growing at a rate of about 1.25 percent, according to a forecast released today by the Indiana University Kelley School of Business.

 

Over the past year, political dysfunction and international trade friction have disrupted supply chains and eroded both consumer and business confidence. U.S. employment has grown during 2019 but will decelerate throughout 2020, well short of 150,000 jobs per month and possibly to about 100,000 by year's end. A tight labor market will continue to be an issue for many companies.

 

"The total number of job openings in the economy peaked in late 2018," said Bill Witte, associate professor emeritus of economics at IU. "Average hours worked have been flat over the past year, and auto sales have been flat for nearly two years. Given the reliance of the U.S. economy on consumer spending, these are disturbing signs. But they are vague signs, and not enough to convince us that the end of the expansion is in sight.

 

"We expect that growth will be weaker than in the past two years, and this outlook is likely a best-case outcome," he added. "There is massive uncertainty in the current situation."

 

The Kelley School presented its forecast this morning to Indianapolis community and business leaders at IUPUI. The Business Outlook Tour panel also will present national, state and local economic forecasts in seven other cities across the state through Nov. 20.

 

Indiana's more meager economic growth expected in 2020 can largely be attributed to the outsized presence of manufacturing and particularly tight labor markets, said Ryan Brewer, associate professor of finance at Indiana University-Purdue University Columbus and author of the panel's Indiana forecast. Manufacturing contracts more rapidly versus other areas of the economy, and tight labor markets limit employers' capacity to grow, he said. 

 

Expectations about business investment have fallen short, and corporations have been buying back stock instead of making capital investments. The trade war with China and slowing global expansion have also affected state manufacturers. 

 

The world is about to record its slowest economic growth since the financial crisis of 2009. Next year, global growth is projected at 3.4 percent, with downside risks continuing to build. China and the European Union each face structural issues amid tariffs imposed by the United States. Brexit remains unresolved.

 

Recent data from the Institute for Supply Management showed that manufacturing activity has slowed to its lowest rate since the beginning of the Great Recession. Indiana has sought to diversify its economy in recent decades, but manufacturing output represents nearly 28 percent of gross state product. Indiana continues to lead the nation in manufacturing employment, with more than 17 percent of its jobs in that sector.

 

"Constrained by a historically tight labor market, Indiana is expected to experience slow growth in jobs and gross output, along with the possibility for continued rising wages," Brewer said. "With fewer and fewer available people to hire, tightness of the Indiana labor markets will serve as a drag to output and employment growth."

 

The outlook for the Indianapolis-Carmel-Anderson metropolitan statistical area is slightly better, with expected growth between 1.5 and 2 percent.

 

"Indianapolis continues to draw in talent and investment that should help it exceed the overall state level of growth," said Kyle Anderson, clinical assistant professor of business economics. "However, there is risk that weakness in the broader economy, and especially weakness in manufacturing, could make this forecast too optimistic."

 

Other highlights from the forecast:

 

  • The national and state unemployment rates will hold steady. The nation's rate could be below 4 percent by year's end, and the state will stay at or below full employment through 2020. 
  • Inflation will rise and end 2020 close to the Federal Reserve's 2 percent target.
  • The stock market will struggle to get average returns with headwinds from trade, supply chain disruption and policy uncertainty.
  • Earnings continue to exceed expectations, yet lack of definitive trade consensus continues to drive headwinds.
  • Interest rates will remain low. The 10-year Treasury rate should stay below 2 percent and mortgages below 4 percent.
  • Speculative grade bond yields have been rising, indicating increased risk of insolvency for marginal firms.
  • Entry-level wage growth could cause costs to rise, earnings to fall and growth to stagnate for firms heading into 2020.
  • Energy prices will be relatively stable, with average prices similar to those in 2019.
  • Business investment will remain weak, although a little improved from this year. Housing will achieve a meager increase, ending two years of negative growth. Government spending will grow, but much more slowly than the past year, as the impact of the 2018 budget deal ends.

 

The starting point for the forecast is an econometric model of the United States, developed by IU's Center for Econometric Model Research, which analyzes numerous statistics to develop a national forecast for the coming year. A similar econometric model of Indiana provides a corresponding forecast for the state economy based on the national forecast plus data specific to Indiana. A select panel of Kelley faculty members, led by Indiana Business Research Center co-director Timothy Slaper, then adjusts the forecast to reflect additional insights it has on the economic situation.

 

A detailed report on the outlook for 2020 will be published in the winter issue of the Indiana Business Review, available online in December. In addition to predictions about the nation, state and Indianapolis, it also will include forecasts for other Indiana cities and key economic sectors.


Presenting the forecast at the Indianapolis Business Outlook Tour event were Phil T. Powell, associate dean of Kelley academic programs at Indianapolis and clinical associate professor of business economics and public policy; Cathy Bonser-Neal, associate professor of finance; and Anderson.

 

You might also like...

Check out some other posts from Indiana University, Kelley School of Business

3 min

Kelley professor’s M-Score model remains most viable means of predicting corporate fraud

BLOOMINGTON, Ind. — Enhanced oversight over the auditing profession and firms’ financial reporting has led to a proliferation of models to predict financial statement fraud. But one of the first forensic models, the M-Score, devised by an Indiana University Kelley School of Business professor in the late 90s, remains accurate and is the most economically viable for investors to use, according to a forthcoming paper in The Accounting Review — the official journal of the American Accounting Association. The article, “The Costs of Fraud Prediction Errors,” co-authored by M. Daniel Beneish, professor of accounting and the Alva L. Prickett Chair at Kelley, compares seven fraud prediction models with a cost-based measure that nets the benefits of correctly anticipating instances of fraud against the costs borne by incorrectly identifying non-fraud firms as fraudulent. Even though newer fraud models early doubled the success rate of M-Score, which Beneish developed, they did so at the cost of a much larger number of false positives. As a result, the other models are not used in practice by auditors because they are too costly to implement as all flagged firms must be carefully investigated. “I have long known from my experience consulting with Arthur Andersen — for whom my model detected Enron before the debacle — and other public accounting firms, that litigation concerns relating to false positives — firms incorrectly flagged as having fraudulent financial statements — created an unwillingness by auditors’ general counsel to use fraud prediction models in practice,” Beneish said. “My efforts back then to improve the M-Score in the context of auditing failed because I could not increase the model’s success rate without increasing the number of false positives. It seems that the new models cannot either,” he added. Interestingly, as early as 2017 the M-Score flagged Kangmei Pharmaceutical, a Chinese publicly traded company that was involved in financial reporting fraud between 2016 and 2018. Like the Enron scandal in the U.S., the Kangmei Pharmaceutical scandal helped trigger new regulation in China that increased regulatory penalties for financial fraud (effective March 2020) and last November became China’s first successful class-action lawsuit involving corporate fraud. Its chairman was sentenced to 12 years in prison. “The main purpose of our paper is to provide evidence on the costs and benefits of using fraud prediction models, and to show whether using these models is economically viable for auditors, investors and regulators,” Beneish said. “This is important because the traditional measures commonly used in recent research to justify new models are misleading about model performance in fraud samples as the proportion of fraud firms in the population is very small, and as they typically assume that the cost of a false positive and false negatives (missed detections) are equal.” For example, assume that among 10,000 publicly traded firms, there are about 60 fraud firms and 9,940 firms without misreporting. The newer models detected 42 frauds (70% of the total frauds), and incorrectly flagged 3,976 firms (40% of the non-frauds). The latter is too large a number for most decision makers to investigate. “Our evidence that a cost-based assessment of models is preferable to traditional model comparison measures (e.g., area under the curve), should become even more important as efforts by future researchers in the areas of data mining and machine learning intensify,” Beneish said. Patrick Vorst of Maastricht University, assistant professor in financial accounting and accounting & information management, co-authored the paper with Beneish.

3 min

Declining viewership for live events, including the Super Bowl, presents concerns for advertisers

This year’s NFL Championship, best known as the Super Bowl, will again be one of the most watched events. But public interest in live events appears to be declining, even for the “Big Game,” say two marketing professors at the Indiana University Kelley School of Business. “Live sports events are the last stand for live TV, with the Super Bowl being the biggest spectacle to unite the American audience. Live events like this are languishing. Need proof? Look at record low ratings for award shows,” said Ann Bastianelli, teaching professor of marketing at Kelley, who added that the Super Bowl remains “a rare opportunity to gauge the U.S. cultural consciousness.” “The early reports and teasers suggest that Super Bowl viewers are in for a smorgasbord of memorable and even humorous commercials, providing some much-needed laughs during the ongoing pandemic. Even so, the Super Bowl isn’t enjoying the same viewership it once had which should prompt changes in marketing decisions,” added Demetra Andrews, clinical associate professor of marketing. With a television audience of more than 90 million last year, the Super Bowl continues to provide the biggest platform for advertisers. But, according to Andrews, television viewership of the Super Bowl has declined fairly steadily for years and the increase in livestreaming of the game does not account for the decline. Of note, she said, is a persistent decline in watchers aged 18-49 since 2008, a key component of the Super Bowl audience. According to Morning Consult, 40% of Generation Z-aged American aren’t sports fans, compared to only 24% of Millennials opting out of sports. Gen Z may be more likely to watch and share ads online than during the sporting event. “Despite this, the price for advertising during the Super Bowl has remained high for a 30-second ad. This is likely to prompt marketing organizations to reexamine the value of the Super Bowl as a promotional platform,” Andrews said. The cost of a 30-second commercial in the 2022 game is $6.5 million, up significantly from the $5.5 million price tag of just a year ago. “Clearly, the network is not bashful about asking that, even with the misgivings that advertisers have had in the past few years,” Bastianelli said. Super Bowl parties traditionally have been a big part of the game day experience and something most attractive to advertisers. But with larger gatherings discouraged and even restricted last year, this aspect was greatly diminished for the 55th Super Bowl. More people may gather to watch the game, while others will be hesitant to do so. “Without Super Bowl parties, brands might not get the same return on investment, because people couldn’t discuss ads in real-time with others, so brands shifted to digital/online advertising to avoid the $5.5 million price tag,” Bastianelli said. They also do this “because spending money online builds reach and frequency and gives brands valuable data to maximize customer engagement much more cost-efficiently. “The downside is that, while culture spreads at the speed of social, it’s much harder to stand out with sustained hype,” she added. Reevaluation of the Super Bowl as a promotional platform should include a determination of whether an organizations’ target customer groups are likely to watch or attend a Super Bowl event, Andrews said. Both professors are available for interviews. Contact George Vlahakis at vlahakis@iu.edu for assistance.

2 min

Companies face unique marketing challenges during Olympics due to human rights concerns

Many companies have used the Olympics as an ideal platform for positioning their brand to worldwide audience. However, with the games being held in a nation facing international criticism over human rights and privacy issues, the 2022 Olympics in Beijing Feb. 4-20 will present challenges in marketing. Kim Saxton, clinical professor of marketing, said China’s human rights policies present a predicament for Olympic sponsors. While some companies – such as the Coca Cola Co. – have said they won’t advertise at the games, others that do may take a different approach than they have in the past. “It creates an interesting challenge. There is more airtime available and the controversy is stoked. The athletes deserve the support. In fact, they depend on it. But with the U.S. government not sending a delegate, it creates an air of caution,” Saxton said, adding “the U.S. government has not expressly said that companies cannot advertise. “There are other issues to consider as well. First, the winter Olympics have been very quiet. It’s quite unusual to have summer and winter Olympics within one year. Many consumers need that bi-annual cadence in order to process information about the Olympics and get excitement up,” she added. “Many Americans right now probably cannot name an athlete in more than one sport. And the games start in about two weeks. “Traditionally, the Olympics is one of the few places that advertisers can find a critical mass of viewers on TV today. The Super Bowl, the Olympics and the FIFA World Cup are the largest TV audiences. So, advertisers have to be creative this year. Some will not mention the host city. Some will run ads that don’t mention the Olympics. Some will stay away. Finally, some will move their efforts to PR. They will balance a fine line of promoting their brands and athletes, while not promoting China.” Saxton can be reached at mksaxton@iupui.edu.

View all posts