Gas prices will impact Indiana's economy in 2012, says economist

Topic: Miller College of Business

December 12, 2011

The cost of a gallon of gas will continue to play a major role in Indiana's economy in 2012 as the state slowly recovers from the recession, says a Ball State University economist.

Michael Hicks, director of Ball State's Center for Business Research, anticipates that personal income will rise by 1.2 percent next year and unemployment could drop to 8.3 percent by the end of 2012 if gasoline prices stay close to $3 a gallon.

However, if gas prices approach $4 by early summer and stay at that level the rest of 2012, personal income will increase only 0.5 percent and unemployment rates will be at 9.5 percent, he said.

"Indiana's economy begins 2012 in a period of ongoing slow growth, and the next 12 months could resemble 2011," Hicks said. "While gasoline prices have declined recently, there are continued risks of volatility and higher prices for both petroleum commodities and retail gasoline through the coming year.

"Likewise, sovereign debt risk in European Union nations continues to dampen expectations of future economic growth internationally," he said. "These types of issues are like a cloud over the state's economy. We saw in 2011 that when gasoline prices fell in the early part of the year, Indiana's economy started to improve but when gasoline prices rose in the second quarter, the economy slowed and remained sluggish throughout the summer and autumn of 2011."

The Indiana Econometric Model: 2012 Economic Forecast provides two scenarios: a rosier forecast with lower gas prices and more austere outlook with higher gasoline costs.

Under the rosier scenario, Hicks forecasts stronger growth in construction, retail, wholesale trade, transportation, communications and public utilities. He also anticipates continued slow growth in services and health care while forecasting declines in personal income in finance, insurance and real estate, state and local government and manufacturing.

In Hicks' more austere environment, higher gasoline prices affect the cost of production and the demand for nonpetroleum products and services. He expects declines in personal income in finance, insurance, real estate, state and local government and manufacturing.

At the same time, the report anticipates expanded output in transportation, communications, public utilities and construction as government, businesses and consumers spend more money on higher cost utilities, transportation and construction of information technology.

Hicks believes that gas prices also will impact several communities. Under the low gasoline price scenario, all the state's larger communities — except Muncie — will see growth. Under the high gasoline price scenario, Muncie, South Bend-Mishawaka and the Chicago suburbs in northwest Indiana will see declines, while all regions will experience lower levels of personal income growth.

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