IU economic forecast expects recovery to slow, jobless rate to remain elevated

Although the COVID-19 pandemic clouds the future of the local, state and national economies, a new forecast from the Indiana University Kelley School of Business expects the recent recovery to slow in 2021 and for the elevated unemployment rate to endure well into 2022.

The forecast holds out hope for positive economic growth in the second half of 2021 in Indiana. It assumes that the state will either remain at Stage 5 of Gov. Eric Holcomb’s reopening plan or operate under even fewer restrictions. It also assumes that the federal government will provide another round of at least modest economic stimulus.

“Indiana is relatively well-positioned to outperform peer states and the U.S. as a whole during the recovery period when we emerge from the COVID-19 pandemic,” said Kyle Anderson, clinical assistant professor of business economics and faculty chair of Kelley’s Evening MBA Program.

“Slack remains in the Hoosier labor force, providing an opportunity for growth as we move into 2021,” Anderson said. “We will expect to see slow or even negative growth conditions during the last quarter of 2020 and the first quarter of 2021, as we face new waves of infections.”

Unemployment isn’t expected to soon recover from the pandemic, either nationally or in Indiana. Fewer workers likely will hamstring any recovery.

Indiana’s unemployment rate skyrocketed from 3.2% in March to 16.9% in April as the coronavirus crisis paralyzed portions of the economy in the state and across the globe. The national unemployment rate jumped to 14.7%.

Indiana’s labor force—which is composed of both employed and unemployed-but-willing-to-work residents—shrank by 40,450 workers from March to April, dropping from 3.27 million to 3.23 million. All told, an estimated 545,909 Hoosiers were unemployed and seeking jobs, according to the state.

The numbers have improved markedly in recent months. The state’s unemployment rate fell from 12.3% in May, 11.2% in June, 7.8% in July, and 6.4% in August to 6.2% in September. The U.S. unemployment rate improved to 7.9% in the same month.

By September, the state labor force had recovered to 3.33 million. An estimated 208,282 Hoosiers were unemployed and seeking jobs.

However, employment is unlikely to get back to its pre-shutdown peak until well into 2022, the study said.

The study notes that 2020 is ending much as it began, with spikes in COVID infections.

“While the Great Recession unraveled slowly and painfully—like a severe drought—causing predictable accumulating damage over a period of several months, the COVID-19 pandemic struck like a tornado, without warning and with significant power,” said Ryan Brewer, associate professor of finance at Indiana University-Purdue University Columbus and co-author of the Indiana forecast.

The Indiana State Department of Health on Sunday reported 4,689 new cases of COVID-19, the fourth day in a row that new cases have exceeded 4,000 and the 18th straight day they’ve exceeded 2,000.

Hospitalizations due to COVID-19 rose from 2,036 on Friday to an all-time high of 2,070 on Saturday. The department said the seven-day moving average for cases reached another all-time high of 4,055.

Although the number of COVID cases is again on the rise, Brewer believed lessons learned from the first months of the pandemic will soften the economic impact.

The study has brighter hopes for the Indianapolis metropolitan area, which accounts for 29 percent of the state’s population and about a third of state employment and income. The region’s economy likely will recover much of its losses in economic output and number of jobs next year, Anderson said.

The study warns that federal stimulus is badly needed to protect businesses and households until the worst effects of the pandemic are dealt with.

“We are modeling a most likely outcome that there will be a modest stimulus package that will have beneficial effects in 2021’s first quarter,” Anderson said. “The absence of any stimulus will likely lead to a slower recovery.”

Other key points from the forecast:

— Consumer spending may recover, but it will be geared toward purchasing goods and not services.

— Housing construction should continue to expand, but businesses will shy away from investments in new facilities.

— Short-term and longer-term interest rates will remain low in 2021 and well below historical averages.

— Corporate earnings among companies in the S&P 500 are expected to rebound strongly from 2020 levels.

— The world economy is expected to shrink by 4.4 percent in 2020 before expanding by 5.2 percent next year. But any resurgence of COVID-19 infections and tightened government restrictions can threaten to drag the world into a global recession.

— China will be the only major economy with positive growth in 2020. The Chinese economy will expand by 2 percent by the end of the year, thanks to a robust recovery that hasn’t been hampered by a strong resurgence of the virus. The growth will further strengthen in 2021 to a rate greater than 8 percent.

Federal officials reported in late October that the U.S. economy grew at a sizzling 33.1% annual rate in the July-September quarter—by far the largest quarterly gain on record—rebounding from an epic plunge in the spring.

Yet the recovery from the deepest recession since the Great Depression of the 1930s remains far from complete. The Commerce Department’s estimate in late October of third-quarter growth regained only about two-thirds of the output that was lost early this year when the economy essentially froze as safety orders forced restaurants, bars and many retailers to shut down.

The economy is now weakening again and facing renewed threats. Government stimulus has run out. With no further federal aid in sight this year, Goldman Sachs has slashed its growth forecast for the current fourth quarter to a 3% annual rate from 6%.

Though the national unemployment rate, at 7.9%, is down significantly from 14.7% at the start of the pandemic recession, it is still historically high. The economy is still roughly 10.7 million jobs short of recovering all the 22 million jobs that were lost to the pandemic.