Hicks: Indiana’s economy is growing, yet falling behind

Last week, I presented my 2025 economic forecast to a large group in Muncie. The projections for 2025 are strong for Indiana and the U.S., with a few matters to be concerned about.

First, the good news.

I project the U.S. economy to grow between 2.5 percent and 3 percent in each quarter, with annual growth ending at about 2.8 percent in inflation-adjusted terms. Indiana will also do well, growing at between 2.3 percent and 2.5 percent over the same time, ending the year with an economy that is 2.4 percent larger than today.

Both estimates offer stronger growth than usual since the start of the Great Recession. It is now time to consider that the slow growth that gripped the nation between 2007 and 2019 might be over.

One caveat here is that the differences in growth between Indiana and the U.S. are actually pretty large. One way to think about this is to consider how long it would take for the size of the U.S. and Hoosier economies to double at these different rates of growth.

At 2.8 percent growth, the U.S. economy will double in size—in inflation-adjusted terms—in just under 26 years. At 2.4 percent growth, it will take Indiana 30 years to double the size of the economy. Today, the average American worker earns about 13 percent more than the average Hoosier. If the slower growth projections are correct, the income gap between Hoosiers and the rest of the nation will continue to grow substantially.

The Hoosier economy is growing, but at the same time falling further behind the rest of the nation. I hope my forecast is pessimistic. But, over the past few years, I have over-projected the Indiana economy by a tad bit less than 0.2 percent. Let’s hope I’m wrong in the other direction this year.

I also project employment to grow by 37,000 more jobs this year. That would be a slower pace than in recent years. However, constraints on labor force availability weigh heavily on an economy with a 4.4 percent jobless rate.

The slower rate of GDP growth and slower job growth I project for 2025 are consistent with the soft landing I continue to expect from our recent bout of inflation. Obviously, some of the economic activity we can expect in the short run will be dependent upon the Federal Reserve’s decisions about interest rates. Inflation is stubborn, and getting the last few percentage points back to their target rate has been slower than I expected. Thus, I now expect the Fed to pause rate cuts at least by a few months.

The recent recovery has also seen differences in growth by industry. Manufacturing is one to always watch here in Indiana—the nation’s most manufacturing-intensive state.

Since the COVID downturn, factory productivity has risen substantially. The average manufacturing employee is today producing roughly 26 percent more value of goods each year than they were in the quarter before COVID started. That growth in factory productivity has been lacking since the end of the Great Recession.

Productivity growth in manufacturing results in several things. It typically means higher wages for workers, better profits for producers and lower costs for consumers. It also means fewer jobs.

Manufacturing employment today is lower than it was in 2018, before the Trump tariffs took effect. It is also lower than in the early days after COVID-19. The culprit is primarily productivity growth in recent months. If productivity grows faster than demand for goods, there will be job losses in manufacturing. We appear to be back on that trend.

There are three worrisome aspects to my forecast which I’ve written about in the past. First, the average wages for Hoosier workers, relative to the rest of the nation, continue to slide. The average Hoosier worker takes home less about 84 cents on the dollar when compared to the typical American. The average Hoosier factory worker takes home about 86 cents on the dollar compared to the typical America factory worker.

This is a growing economic challenge for the state. A short 25 years ago, our factory workers earned the national average wages in manufacturing and, overall, our wages were just 6 percent below the nation as a whole. I know of no other state that has seen this large a decline, and I know of no current or proposed policy that will have any meaningful influence on this wage gap.

The second problem is the composition of jobs in Indiana. I use manufacturing as a bellwether data point. I look back 20 years to January 2005. Since then, factory jobs in our state and the rest of the nation have faced a well-known pattern of growth. We have more high-skill jobs and more low-skill jobs. The middle-skill jobs have declined precipitously.

Since 2005, Indiana has seen solid growth of manufacturing jobs for adults without a high school degree. Those occupations, which pay less, grew by 3.3 percent. College graduates working in manufacturing saw growth of 3 percent. The middle-skill jobs held by high school graduates and those with some college or an associates degree declined by 7.9 percent and 3.5 percent respectively.

This change reflects the trends of automation in the workplace. Jobs that are traditionally performed by college graduates, such as engineering and technical positions, have been resistant to automation. Jobs that are still performed by workers without a high school degree have also proven resistant to automation.

Jobs performed by people with a high school degree, or maybe a couple of years of college, have really been subject to losses due to automation and technology. In short, though manufacturing productivity growth is great for businesses and consumers, it has proven tougher for communities and workers when jobs are eliminated.

Finally, I look to the greatest sources of uncertainty about 2025. This year it is not inflation, but federal tax and immigration policy. Indiana has far fewer immigrants than most nations, illegal or otherwise. We need more, but federal policy is likely to lead to fewer immigrants in the coming years. Without immigration, Indiana’s population growth will essentially halt, and then begin to decline. That will be a challenge for about 80 counties statewide.

A more immediate challenge lies in potential tariffs. The last round of Trump tariffs pushed Indiana to the brink of recession by 2019. COVID spared us from an obvious tariff recession. The 2018 tariffs on China were modest compared with statements made by the leaders of the incoming administration. An immediate 20 percent tariff on all imported goods will push the Indiana economy into recession in late 2025, before the inevitable retaliatory tariffs on Hoosier corn, soybeans and pork.

In short, 2025 looks to be a solid year of growth, overshadowed by longer-term concerns and very high policy uncertainty.