Indiana Business Research Center

A publicationof the IndianaBusiness Research Center, lndianaUniversity School of Business IndianavleBusiness Volume64. Number 2 July1989 TheNationalOutlook BruceL. Jaffee MidyearReview ot the Outlookfor 1989/ 2 J. FredBateman PersonalConsumption / 2 LawrenceS. Davidson NonresidentialInvestmenl / 3 R.Jeffery Green FiscalPolicy / 4 MicheleFratianni TheInternational Economy / 5 RobertC. Klemkosky lnterestRates and Financial Markets / 6 LawrenceS. Davidson andBruce L. Jaffee Inflation,Unemployment, and Capacity Utilization / 6 Jeffrey D. Fisher Housing/ 7 The StateOutlook MortonJ. Marcus TheMidyear Indiana Forecast / 8 RobertKirk Indianapolis/ 9 LeslieP Singer Gary-Hammond-EastChicago (Calumet Area) / 12 MarvinFischbaum TerreHaute / 13 MauriceTsai Evansville/ 14 FayR. Greckel Jeffersonville-NewAlbany (Louisville Area) / 15 ThomasL. Guthrie FortWayne / 18 PatrickM. Rooney Columbus/ 19 JohnE. Peck SouthBend/Mishawaka-Elkhart/Goshen / 20 RobertJost Muncie/ 22 AshtonVeramallay Richmond-Connersville-NewCastle / 23 2 / Indida Bsins Review MidyearReview of the Outlookfor 1989 BruceL,taff€e continuedits slow improvement.On a duction levels within OPECwe expect twelve-monthmoving averagebasis energyprices io decline from their Chairpersonakd Prclessorof B sifiess our merchandisetrade deficit peaked current levels. konomicsand Prblb Policf,Ifrnittla in early 1988at nearly $13billion per We predicd last Decemberthat UnbersitySchool ol BusinPss month.While still significant,this trade the federaldeficit would remainat the balanceis now runningin the$9-10 $150billion annual level. Although the Thefirst six monthsof1989 have not billion'per-month range.There has fiscal year 1990budget now being shakenour confidencein thebroad beenlittle improvementin our mer- developedin Washingtonwiu fomally outlinesof its outlookfor the national chandisetrade balance with Japanand comeunder the Gramm-Rudman- economyin 1989.hst Decembetwe theso-called newly industrialized Hollingstarget of$100 billion, that goal predictedpositive but sluggishgrowth countries(Singapore, Hong Kong, is achicvedonly through creative in realCNP in 1989with modestly SouthKorca, and Taiwan), but our accounting-moving expendituresand risinginfl ation, continu€d improve- tradebalance has improved signifi- revenuebetween fiscal years and mentin our tradebalance,rcductions cantlyrelative to Canadaand Westem taking somesignificant expenditures, in therates of growthofconsumption Europe.Nonetheless, thc tradedeficit suchas the saungsand loan bailout, to andinvestm€nt, and littleprogress in andthe cunentaccount deficit are off-budgetcategorieg. On a more reducintthe fcdcralbudget deficit. likely to ling€runlessthe dollar positive note, we are pleasedthat RealGNP grew at a fasterseasonally dcprcciatcsfurthcr in value,and that Coneressand thc ExccutiveBranch adjustedannual rateduring thc first dcclinein valueis unlikelyto beas havdagrcedrelatively early on a quaftcrof 1989than it did during the greatin 1989as we predictedlast spendingtarget for fis.alyear 1990 of fourthquarter of 1988,butthat increase December, approximately$1.2 trillion, This will wassomcwhat artificial; if thelingering Thcsfrcngth of thc U.S.stock eivedecisionmakers some time to effectsof the 1988drought were ma*et duringearly 1989 was also a iork on improvingconsistency and removcd.real growth in thefirst half of surprisc.A slowdownin theeconom, efficiencywithin govemmentexpendi- theycar was significantly less than the risinginterest rates, and gtagnant turcPrograms. growthin thelast halfof 1988.We con- corporateeamings are usually associ In summatv, we continue to see tinueto bclicvethata recessionwill be atcdwith a downmarket. Investor 1989as a stow arowth year, but one avoidedduring 1989and that ona confidcncein thc fir6tpart of thisyear thathas relatively balanced Fowth ycar-over-yearbasis real GNP will has beenpropelled by increasesin the amongthe major s€ctorgand avoidsthe Browbetween 2.070 and 2.57,. While valueof thedollar, a beliefthat a soft rccessionthat many peopleFedicted theoverall structurc of our forecast landingwill occur,and feelings that for the year. appcarsto be on the mark, there a inflationwill notbea rnaiorproblem. numbcrofdctailsthat have suprised us We still clingto our prcdictionthat the somewhatduring thefirst halfof 1989. marketis fully valuedifnot overvalued Probablythe most unexpected de- at its current0ate May) levcls. PersonalConsumption velopmentis the strengthof thedollar A third areathat is rec€ivintcon- duringthe firct half of theyear. From siderableattention is thcrise in infla- J. FredBateman itspeakin February1985, thedollar de- tion in thefirst half of 1989.Capacity clinedin valuesharply for thenexttwo constraints,especially in theexpo - PlofessotofBusiness Eco omicsand years.But since then the dollar's rclated secto$ of the economy,and the PublicPolicy,Indiana UnbeEity Sdt@lof declinehas, at bcst,been modest. In increasedvalue of the dollar are two Business fact, it has increasedin valuc during important factorsfor the incrcasein the last few months.The strengthof the inflation.Much attention has becn Last fall we forecasta growth in aggre- dollarreflects real interestratesin the given to the rapid increasein energy gateconsumption of about1.57o, down UnitedStatet continued trowth of the pricesduring the first few monthsof from preyious yearsin the cu ent eco- U.S.econom, a positive investment 1989due to actionsbyOPEC, the oil nomicexpansion. We sawitrcmaining climatein theUnited States, and a spill in Alaska,and theddlling plat- a positive factor in the economy,but concemabout political instability in folm explosionin the North Sea- not a robust or leading sector.We find Japanand West Cermany. Our trade However, we view theseas ternporary no reasonto alter that aggregate balancein thisenvircnment has phenomenaand with increasedpro- forecast.Although spendingon some Iury 1989/ 3 products,paticularlydurable goods, snall reboundin early 1989.This a sustainable7% amual growth rate for foreign-madeproducts, and Soods weaknessi9 generallyattributed to 1989.Events since November suSSest a sensitiveto interestrate levels, is less higher intercst ratesand rising import slightly slowerpace,apFoximately than expected,we believethat contin- prices. 6E. ued grdwth of disposableincome will In December,we foresawat most What has rof chang€dis that "slightly keeDoverall consumer spending only higher energyprices." American industry, primarily the exp:nding,albeit at a m6destra-te. Without quibbling on how much that rnanufacturings€ctot is facedwith an Our forecastfor the major compo- could imply, it is rcasonableto assume insufficient capital stock.Capital nentsof consumPtionalso rernains that has alrcady occurredearly this spendingexpanded vigorously in 1988, valid. Consumerspending on seruces, year, Thus our outlook for this area but a disproportionateshare of the risinsatatout a 4%annual rate, is may also tum out to havebeen some- expansionwas in busin$s equipment, shon:gerthat at any time during the whatophmistlc. As summerap- with lessof the increaserelegated to rccentpast.Civen their s€nsitivity to proachesfuel pricesrnay follow their structures.Therc is, thercfore,substan- incomegrcwth and their genenl normalpattem of increaseqadding to tial pressurefor more spendingon insensitivity to intetest rates,services whatalready has happened. We still do structures.First, capacityutilization shouldcontinue to be thestrongest not,hor4ever, see energy prices rising mtes in export industdesare very high, componentof perSonalconsumption sosharDlv as to causemaior disruplion and thesefirms cannotproduce much sDen'dinefor tfrecoming month3. Ex- rn theetdnomy and rts pt"aictea igSg morewithout expanded plants. Second, pindiruri growthfor ndndurablesjs growth rate. multinationalfims will continueto behavingin thegenetally weak Pattern To conclude,we find no reasonto locatenew plantshere, While the we foresawlast fall. And durable changeour basicconclusion retarding faltingdollar has inspired more firms goodsconsumption has softened personalconsumption in the1989 econ_ to locatein theU.S., some fitms worry relativeto PrcviousYears. omy.Spending overall will remain theymightbedenied direct ently to posrhvebut weak.What strentth there "FortrcssEurope." These firmg, unable is derivesalmost completely from the to move to Europe in the neal ftrturc Giaentheir sensitittity to consumptionof services,the effectof but desiringeventual access to thisnew whichhas been to offsetpoor automo- largerMrket, might seea locationin incomegrowth and their gen- bile salesand weak durable goods theU.S. today as a potentialbackdoor eralinsen,itiaity to intercst marketsgenerally. A sustaindinterest to Europeanmarkets after 1992. Third, rat€decline might stimulate auto 6ales fims who want to continueto comp€te rates,seraices should continue latcrin theyear, but our overall in clobalmarkets know thatthev must to bethe strongest component forecastof a 1.57o growth in consumP- mo"demizetherr productive capital, and ofpersonal consuffiption tion spcndingappears reasonable. while the first wave of changemay Whateverstrcn8th there is in economic have beenconcentrated in equipment spendingfor thecoming growththis will will ortinate in areas purchases,additional spending on months. other than pe$onal consumPtion. structurescan't be too far behind. Sowhat has changed? For one thing. interestratcs roseto the toP of Within the components,however, our 1989forecast ranges early in 1989. someadjustments in our forccastare NonresidentialInvestment

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