Micah Pollak is pictured at Indiana University Northwest.
The national economy faces headwinds, but the Northwest Indiana economy should be relatively strong in 2023, a local economist is forecasting.
Indiana University Northwest associate professor of economics Micah Pollak, the director of the Center of Economic Education & Research, predicts no change in the Calumet Region's gross domestic product in 2023. But he forecasts that wages will rise 5.2% and personal income 6.7% while the unemployment rate will average about 3.7%.
"While Northwest Indiana has faced substantial economic upheaval in the last few years and uncertainty surrounding inflation and the labor market in the coming years, the forecast for Northwest Indiana in 2023 is relatively strong," Pollak wrote in an economic outlook in the Indiana Business Review and as part of a statewide tour of IU professors that made a stop in Schererville. "Efforts by the Federal Reserve to fight inflation through higher interest rates and further unwinding of quantitative easing are likely to be successful and we may see the federal funds rate stabilize in the first few quarters of 2023. Likewise, as firms and households continue to adapt and adjust to the expectations of workers following the Great Reassessment of Labor, we will see the labor force stabilize and firms will find ways to accomplish more with fewer workers. For the next few years, it is likely we will see a continuation of historically low unemployment rates and higher incomes, as well as a more worker-friendly labor market, perhaps at the expense of firms."
Inflationary pressures, weakening consumer spending and negative growth in government spending have been drags on the economy nationally, said Willard Witte, associate professor emeritus of economics at Indiana University Bloomington.
"The economic outlook for 2023 is uncertain in the extreme. If a lot of things go right, we could end up with reduced inflation, strong consumer spending and slow growth," Pollak wrote in his economic outlook. "Or with a mild recession. If a financial outburst or black swan event materializes, possibly something significantly worse."
Accelerating inflation has been a significant challenge in both the state and nation, Pollak said. Annualized inflation has been as high as 8.7% over the most recent three quarters as compared to a historical average of 3.9% over the last 50 years. Nationwide, inflation reached an annualized rate of 7.9% since the first quarter of 2021.
"In the Chicago Metropolitan Area, which includes Northwest Indiana, inflation has generally followed the national trend with lower-than-typical inflation during 2020 offset by higher-than-typical inflation since," Pollak wrote. "While prices have risen dramatically in the last 18 months, inflation over the entire three-year period spanning the pandemic has been 4.8% per year. In addition, inflation during this period was driven predominantly by rising energy prices (+16.7% per year), specifically by higher utility gas service prices (+32.4% per year) and motor fuel prices (+14.1% per year). Excluding energy, prices rose 4% per year between 2019 and 2022, which is only somewhat higher than the long-term average annualized inflation rate of 3.4% (from 1977 to 2019) for the region."
Another issue is the great reassessment of labor, which resulted in a tight labor market that's been beneficial for households but difficult for businesses, according to Pollak. The unemployment rate has held for the last year between a historic low of between 3.5% to 4%.
The tight labor market has put upward pressure on wages.
"Even with a higher-than-typical annualized inflation rate of 4.8% since 2019, earnings in Northwest Indiana have not only kept pace but exceeded the rise in prices with average earnings rising 6.7% per year since 2019," Pollak wrote. "Compared with 2019, the purchasing power of worker earnings in Northwest Indiana has risen by 1.7% per year after adjusting for inflation. This contrasts with the state of Indiana, where purchasing power has declined by 1.7% over the same period, and nationally, where purchasing power fell by 0.5%. In addition, much of this real growth in wages has been concentrated in traditionally lower-income, service-sector jobs, such as food service and retail trade. This has significantly reduced poverty and helped alleviate some income inequality."
Low-income households have been hit hard by rising energy costs, particularly gasoline. But in Northwest Indiana, growth in income has exceeded the rise in prices due to rising wages in fields like retail, food services, hospitality, nursing and education.
"Early in the pandemic, consistent with the national trend, the unemployment rate for Northwest Indiana rose to a record high of 19.2%. Since then, the unemployment rate has plummeted to well below the typical level, falling to a record low of 7,798 persons unemployed and an unemployment rate of 2.4% for Northwest Indiana in December 2021," Pollak wrote. "Since then, both have remained below the historical average level. While increasing consumer demand for services is one factor contributing to this low unemployment rate, the more significant factor is a decline in the labor force."
Northwest Indiana's labor force grew at an average rate of 0.2% per year over the past decade, lower than the 0.8% average statewide. But about 8,900 workers left the labor force in Northwest Indiana during the pandemic, a drop of 2.6%. That's much higher than the statewide decline of 0.4% over the same period.
"Today, as employment expands, Northwest Indiana is faced with meeting the increasing demand for workers with the smallest labor force in over a decade," Pollak wrote.
Rising wages, greater demand for benefits like childcare and the increased preference for flexibility in scheduling and remote work have put greater demand on employers.
"The result is an extremely challenging environment for firms, in which traditional responses such as cutting wages or raising prices may not work. Instead, to successfully navigate these economic shifts, firms will need to find creative ways to address both labor challenges, such as greater automation and innovation to increase productivity," Pollak said. "Despite these challenges, there have been some notable successes. For example, while the steel industry is often a source of significant uncertainty in Northwest Indiana, it has been a source of stability for the region since the acquisition of ArcelorMittal by Cleveland-Cliffs in 2020. In 2021, Indiana was the single largest steel-producing state, producing 27% of all raw steel in the United States. This was as much as the next five largest steel-producing states combined."
The Calumet Region's industrial base, including its steel mills, oil refineries and auto plants, continues to anchor the economy with stability, investment and good-paying jobs, Pollak noted. But Northwest Indiana faces long-term challenges that also must be addressed.
"Northwest Indiana is grounded in industries that have recovered quickly from the economic crisis caused by the pandemic," Pollak wrote. "Despite national concerns over a potential recession, the forecast for the coming year in Northwest Indiana is economic growth which will at least keep pace with inflation. The most significant long-term challenge the region faces is not from inflation, but from a declining labor force, and we need to continue to expand efforts to educate our population and attract and retain educated and skilled workers."
Post a Comment