Economy not likely to rebound much in 2010

IUS Economic Outlook provides financial predictions for next year

By DANIEL SUDDEATH

The eye of the economic storm may have passed, but that doesn’t mean recovery will be swift next year, financial forecasters predicted Friday morning.

For more than 30 years, Indiana University Southeast and Indiana University Kelley School of Business have sponsored the Economic Outlook breakfast. In 2008, professors and business minds anticipated a rocky 2009 and this year’s prediction also was somber as told before a sold-out crowd.

“We expect 2010 to be better,” said Bill Witte, co-director of the IU Center for Econometric Model Research and a retired professor.

He was one of four panelists that spoke Friday.

“The bad news is 2009 has been pretty awful, so better doesn’t necessarily mean good,” he said.

Nationally, Witte predicted unemployment rates will peak at 10.5 percent, if not higher, next year. He said the jobless rate will still hover around 9 percent by the end of 2010.

When the U.S. came out of a recession in 1983, the economy grew by more than 8 percent that year. Witte said frailty of the financial market will lead to economic growth of only about 3.5 percent next year — not much of a bounce back following a recession.

The three driving forces of the economy — household, business and government spending — are all reeling and will make recovery slow, Witte said.

He expressed his disdain for federal government bailouts, as the private sector could likely recover faster without interference, he said.

“Historically, there’s been rapid recovery after a recession,” Witte said. “This time around, coming out of this financial debacle, you have to wonder.” Jobs are considered the backbone of the economy — and while it’s expected to better the national trend — the forecast is for unemployment levels to stay elevated in the Louisville metro area, including for Floyd and Clark counties.

The underlying reason for the jobless rate is less consumer spending, according to Uric Dufrene, Sanders chair of the IUS business school.

“The consumer is now saving more, and spending less,” he said.

Even those with jobs will be more conservative with their earnings, he said.

“These high unemployment rates will discourage spending,” he said.

Dufrene anticipates a new consumer model will emerge. He predicted the jobless rate will remain above 8 percent in Louisville metro next year.

Retail sales this holiday season, exports and car sales will be indicators as to how much the economy recovers next year, according to James Smith, co-director of the IU Center for Econometric Research and an IU Kelley corporate finance professor.

While he agreed with the other panelist that recovery will be slow — a

U-shaped pattern if plotted on a graph — he said Indiana has faired better than many of its neighboring states during the recession.

“Indiana has almost been an innocent bystander caught in the crossfire,” he said. “It has been bloody, but not quite as bad as other states.”

He said Indiana has added about 9,000 jobs in the last two months, which leads to some optimism.

But those that have lost positions in the automotive industry likely will need to be retrained as their jobs are probably gone forever, said John Boquist, Edward E. Edwards professor of finance at IU Kelley.

“Hopefully we can provide enough new jobs in Indiana that people won’t be frustrated and leave,” he said.

With people spending less, Boquist said he is concerned the next sector to take a hit will be commercial real estate, such as malls and shopping stores. A weakened dollar also has scared some countries away from buying U.S. debt, Boquist said. The Asian sector — including China — owns 43 percent of U.S. debt, he added.

“They are starting to show resistance to buying any more,” Boquist said.

And the Federal Reserve is also unlikely to pickup more debt, he continued.

The national deficit — padded by bailouts — sapped Witte’s confidence that the economy will be better beyond 2010.

“Frankly, I don’t see much of a way out,” he said.