Despite reports to the contrary, there have been clear signs of a sustained economic recovery in the United States, which is expected to continue through next year, according to a forecast by economists at IU’s Kelley School of Business.

While IU’s Business Outlook Panel doesn’t expect to see numbers matching the 7.2 percent growth registered in the third quarter of 2003, they do expect output growth next year to approach 4 percent. The growth will be more broadly based than during the past two years, when household spending on consumption and housing was keeping the economy afloat.

In 2004, household spending will be joined by significant increases in business investment in new plants and equipment, and probably also in some inventory rebuilding.

Overall output growth for all of 2003 will be approximately 3 percent, because growth has accelerated in the second half of the year. At the same time, inflation has remained close to 2 percent, and interest rates dropped at mid-year to levels not seen in more than four decades.

“Next year should be the best year for gross domestic product growth since 1999,” said R. Jeffery Green, co-director of the Indiana Center for Econometric Model Research and professor of business economics and public policy. ”

Green expressed concerns about a “ballooning” federal budget deficit. “A federal deficit is fine to stimulate the economy during a recession, but with the economy now in a sustained expansion, the deficit should decline, and it is not,” he said. “Steps need to be taken to bring it under control.”

The employment picture is mixed. While establishment employment has declined by more than 1 million jobs since the end of the recession, household employment figures indicate an increase. At this point, the economists aren’t sure which number is more accurate.

“By most measures the economy has performed quite well, and quite close to the outlook we presented a year ago. Yet the man on the street by most reports believes that things are not going well,” observed IU economist Willard Witte, co-director of the IU Center for Econometric Model Research. “Central to this concern is the labor market situation. During the late 1990s, the economy was adding almost 3 million jobs each year. For the past two and a half years, job losses have averaged over a million each year,” he said. “As of September, total employment was nearly 2.7 million below its peak in early 2001. As a result, unemployment has risen steadily to above 6 percent. This is not high by historical standards, but it is far removed from the below 4 percent levels reached prior to the recession.”

In Indiana, total employment has fallen by 6 percent, from its peak in March 2000, to 2,841,844 in September. The largest portion of the jobs lost since Indiana’s employment peak has been in manufacturing, 55.8 percent or 101,246 jobs. The manufacturing sector now accounts for 20 percent of all non-farm jobs in Indiana, down from 22.2 percent in March 2000. Nationwide, manufacturing employment has declined by nearly 16 percent since July 2001.

Other sectors in Indiana that have lost substantial numbers of jobs in the state include professional and business services, which have declined in number by 14 percent since March 2000; and retail trade, which has declined by 12.4 percent over that same period. Both losses reflect the general impact of a sluggish economy, as businesses and consumers cut discretionary spending when money and jobs are scarce.

Jerry Conover, new director of the Indiana Business Research Center (see article), forecasts an increase of only about 1 percent, or about 28,000 jobs, in the Indiana labor force. The state’s unemployment rate is projected to decline slightly from its current, seasonally adjusted level of 5.3 percent to the long-term average of 4.6 percent by the end of next year.

The national forecast calls for the creation of close to 2 million new jobs in 2004 and unemployment near 5.5 percent by the end of the year.

Other predictions:

• International trade should improve. Since the beginning of 1997, the U.S. current account deficit has quintupled to over $500 billion, or more than 5 percent of gross domestic product. This has been due to strong demand by American consumers and businesses for foreign goods, a strong dollar and sluggish demand for U.S. products.

• The jobless recovery has not deterred people from buying homes during the past year, and this is expected to continue in 2004.

• Mortgage interest rates bottomed out at about 5.25 percent in early summer and since that time have increased to about 6 percent. Mortgage rates will rise over the next year to 6.5 percent.

• Corporate profits are expected to rise by about 9 percent next year as the economy continues to grow and recover from the recession.