Things are looking good for Indiana and the Midwest next year because the outlook is favorable for the nation’s manufacturing sector and related capital spending, according to a mid-October economic forecast presented at Indiana Tech.
“In general, I’m really optimistic on the manufacturing side. I think that this capital spend we’ve been talking about is going to especially benefit machine makers, all the tooling and steel and everything else that takes place,” said William Strauss, a senior economist with the Federal Reserve Bank of Chicago. “You know we have 12 percent of the country’s population in our region and we produce a third of the steel. We produce 30 percent of the light vehicles. What makes Indiana unique is it has the largest share of manufacturing.”
The fourth quarter is a popular time of year for economic reviews and forecasts, and Strauss spoke to about 50 business students and faculty at Indiana Tech’s Snyder Academic Center.
Other upcoming economic outlook sessions in the Fort Wayne metro area include the 2017 Star Financial Economic Forum on Nov. 9 with a presentation by Edmond Seifried, a nationally recognized economist, and the local stop of Indiana University’s annual Business Outlook Tour on Nov. 17.
Star’s event will take place at Conference Center B in Memorial Coliseum and the IU Kelley School of Business will present its 2018 forecasts at the Steel Dynamics Keith E. Busse IPFW Alumni Center.
The Community Research Institute at Indiana University-Purdue University Fort Wayne prepared a northeast Indiana economic review and outlook for the IU presentation. Rachel Blakeman, CRI director, will serve on the event’s economic forecast panel. The panel will likely focus on manufacturing as well since it is a significant part of the area’s economy, she said.
“Although the number of workers in manufacturing has gone down over time, the amount of economic product manufacturing creates in the Fort Wayne metro area has actually gone up,” she said. “In terms of what we make, it is predominantly durable goods, items expected to last for three years or more. Obviously that would include product from the General Motors plant, and there are other things as well.”
‘Refreshing’ industrial growth
Many of the forecasts by Strauss at the Indiana Tech presentation were based on a survey of 50 economists by Blue Chip Economic Indicators. Blue Chip was projecting 2.7 percent growth for the industrial sector this year and 2.3 percent growth for it next year, he said.
After seeing no growth in the sector for the last couple of years, this was very refreshing, Strauss said. He excluded Illinois from his upbeat projection for the Midwest because of the state’s fiscal troubles.
Following a surge in the value of the dollar exceeding 20 percent, the U.S. manufacturing sector experienced a challenge in selling goods internationally and competing against imports, he said.
“The good news here is that the dollar has adjusted somewhat and it’s come down by 8 percent,” he said. “It’s still a bit high, but certainly in a better position for trade than what we’ve seen. So when you look at manufacturing, we’re actually seeing some gains in the current year for the first time in a long time.”
Of 1.8 million workers added to the U.S. workforce, about 122,000 of them during the past 10 months were added to the manufacturing sector, he said. And with industrial utilization at about 80 percent, there is room for more manufacturing growth.
“That says that if it got some reason to ramp up and got a lot of orders and started going rapidly, they can do that. They’ve got the capacity; they’d just need to hire some people to work those machines,” Strauss said.
Some of the slack is in automotive manufacturing. With 17.5 million in car and light truck sales last year, 2016 wound up besting the previous sales record set in 2015 by 0.4 percent, making automotive manufacturing’s strongest segment.
“There was an expectation that things would soften a bit. And they actually softened up more than what they were thinking,” Strauss said. “They were already planning on cutting back on some production, but maybe for more like a 1 percent drop in sales. It was probably double that, and so inventories were building up and they were going to have to make some adjustments.”
Sales so far this year of the kind of vehicles consumers tend to buy were down 1.4 percent, with all the softness in cars, which were down more than 11 percent.
Sales of light trucks, such as the Chevrolet Silverados and GMC Sierras made at GM’s Fort Wayne Assembly Plant, were actually up 5 percent.
“Then we had the hurricanes come in, and all of the sudden you need to start replacing vehicles,” Strauss said. “Checks are being written by insurance companies probably, to foster this. It’s a temporary thing, but nonetheless, it has probably helped resolve a lot of the imbalances of this excess supply of vehicles.
“What is expected by Blue Chip is that sales are going to be pretty good all in all, a little softer than the last couple of years, but just shy of 17 million, very profitable.”
The national unemployment rate of 4.2 percent is below what is considered natural for the country, and Blue Chip expects it to edge a little bit lower next year. The Federal Reserve expects the unemployment rate to remain below natural levels through 2020, as the economy grows roughly around trend at 1.8 to 2 percent, Strauss said.
The trend growth rate is calculated by adding the trend growth rate of 0.8 percent for the labor force and the trend growth rate of 1 percent to 1.25 percent for productivity, he said.
President Trump said he would like to see 3 percent growth and noted gross domestic product grew at that rate during the second quarter. But GDP growth was barely above 1 percent for the first quarter, and together they barely averaged over 2 percent for the first half of this year.
The hurricanes are likely to reduce this year’s third quarter GDP growth, but repairing and replacing damaged property will more than make up for that during the fourth.
“The good news is we are far away from a recession. The bad news is there is still no sign that this economy is accelerating,” Strauss said.
Inflation is about 1.5 percent this year, below the 2 percent target the Federal Reserve has for it. The country’s productivity growth would need to double to sustain 3 percent GDP growth, and productivity is increased through the purchase of machinery and the education and upskilling of workers.
Employers have been holding back on their investment in machinery because additional workers have until recently been pretty readily available and relatively affordable.
But, “it is getting more and more difficult for businesses to find those workers, so they are biting the bullet and making investment,” Strauss said.
“In fact, I’m relieved to see in the first two quarters of this year investment getting back with some gusto. And when GDP comes out in a couple of weeks, that’s the first number I’ll look at, what happened with investment,” he said. “And I hope to see that continue, and with that we’ll see productivity improve and therefore wages come back.”
For the rest of this year, “you have an old adage that natural disasters are good for GDP,” Strauss said.
“I don’t think you want to see that occur, but again, we’re going to find that there’s going to be a lot of additional spending on repairs that otherwise would not have taken place, replacement of goods that were destroyed are going to take place, so we’re going to see a slight uptick, relative to what we were thinking before,” he said.
In June, the Fed was projecting GDP growth of 2.2 percent for 2017. But in light of the hurricanes, it now is project this year’s GDP growth will be closer to 2.4 percent.