Kokomo’s economic outlook uncertain

Brian Harris had five words to sum up his outlook on the local economy for 2006, none of them particularly rosy.

“Uncertainty, apprehension, reservation, skepticism and nervousness,” offered Harris, vice president of First National Bank & Trust, during the annual Economic Outlook Panel discussion hosted by the Indiana University Kokomo School of Business.

At a time when the entire community has been rocked by news of Delphi Corp.’s Chapter 11 bankruptcy filing, Wednesday’s panel discussion offered little in the way of optimism.

Harris, who presented the local economic outlook, was joined by three Indiana University professors in giving an overall gloomy assessment for the coming year.

Rising interest rates, the threat of inflation, high energy prices and concerns the housing market “bubble” may be about to burst are factors creating pessimism about the possibility of growth next year, the panelists concluded.

“There’s a great deal of uncertainty right now,” said Bill Witte, an IU professor of economics. “I’ve been doing these economic outlook panels for 10 years and I think there’s more uncertainty now than I can remember during that time.”

Jerry Conover, director of the Indiana Business Research Center, said he expects the state economy to produce only about 25,000 to 30,000 new jobs in 2006, barely enough to maintain the current level of employment.

For the past 12 months, the state’s economy has grown at a rate of around 1 percent. Wages in many sectors, including manufacturing, have continued to decline, Conover said.

Outsourcing of high-wage manufacturing jobs has contributed to the problem, but for the nation as a whole, moving toward a global economy has been a good thing, he added.

“The dollar value of the work done for foreign companies in the U.S. is greater than the work American companies have outsourced to other countries,” he said.

In Kokomo, as in many other Indiana towns, the loss of manufacturing jobs has led to more unemployment. Harris said he expects Kokomo’s unemployment rate to remain between 5.5 percent and 5.8 percent next year; the state average should hover somewhere between 4.6 percent and 4.9 percent.

That assumes no major job loss is experienced at Kokomo’s Delphi Electronics & Safety operations, the city’s second-largest employer with around 5,200 salaried and hourly workers.

Acknowledging the larger-than-usual audience at the sold-out panel discussion, Harris said it was impossible to travel around Kokomo and not hear conversations about Delphi.

“A lot of this apprehension is dependent on what happens at Delphi and I think that’s why we have a record number of people here today,” Harris said.

Robert Neal, an IU professor of finance, said it is perhaps too early to predict a major downturn in the economy, noting corporate earnings are expected to grow next year, although not at the levels seen in the early part of 2004.

But Neal also warned many companies are sitting on large amounts of cash, unwilling to invest in new ventures, and a steep drop in price-to-earnings ratios shows many investors have begun shying away from taking risks.

Witte also raised concerns about household spending, which makes up about two-thirds of the U.S. economy, saying rising fuel prices have injected inflationary pressure into the economy.

He also noted that this week, a luxury homebuilder caused a sudden drop in the Wall Street indexes by forecasting lower-than-expected earnings — revealing the extent of fears about home prices.

One major driver of household spending in recent years has been the ability of homeowners to extract equity from their homes, Witte said.

“The level of savings is very low and to some extent, that has been covered by rising housing values, but I don’t think that will continue,” he said.

Concerns about rising federal deficits, which the panelists blamed on increased federal spending and numerous tax cuts, also are creating concerns about rising interest rates.

“The way we make up for our lack of savings is we borrow from the rest of the world,” Neal said, adding Americans now owe around $700 billion to foreign creditors. “Economists don’t think that can continue indefinitely.”

Most likely, he said, foreign creditors will begin to increase the interest rates they charge, putting “significant upward pressure” on domestic interest rates.

Still, the consensus opinion was that in the short term, at least, the economy will muddle through.

“I expect interest rates to rise some, but not dramatically enough to hammer the housing sector,” Witte said.

The panelists also allowed for the possibility their predictions of a flat economy might not come to pass.

“Things could go better than we expect, but I think there are a lot of possibilities things could go worse,” Witte said.