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Timothy Slaper
Indiana Business Research Center

George Vlahakis
IU Communications

Last modified: Thursday, January 24, 2013

IU Kelley School's Leading Index for Indiana rises in January, but concerns remain

Jan. 24, 2013

BLOOMINGTON, Ind. -- The Leading Index for Indiana in January rose to 100.7 from December's revised reading of 100.4. Perhaps more significantly, all components of the indicator contributed positively this month, including the Purchasing Managers Index, which had been under pressure in recent months.

Despite the LII's move upward, Timothy Slaper, director of economic analysis at the Indiana Business Research Center in Indiana University's Kelley School of Business, said pessimism about the economic future can still be justified.

Consumer confidence plummeted again in December, compounding November's 7.9-point drop with an additional loss of 6.4 to finish with a December value of 65.1, Slaper noted. The Consumer Confidence Index's authors noted that pessimism about the job market and short-term economic growth drove the decline.

The Indiana Business Research Center produces the LII.

Small-business owners are not too sanguine either. The National Federation of Independent Business' Small Business Optimism Index rose very slightly from its historical November low but still remained at its second lowest reading since 2010.

"Small business inventory demand fell and job creation plans weakened, both from levels that were already in the can," Slaper said. "Capital spending remains weak. Seventy percent of the owners characterize the current period as a bad time to expand. One in four of them cite political uncertainty as the top reason why."

On the brighter side, November saw the fourth straight monthly increase in the Architecture Billings Index, with the pace of growth accelerating each month. At 53.2, the ABI is reflecting the strongest growth in billings at architecture firms since the end of 2007, just before the recession in design revenue began. At present, architecture firms in the Northeast and Midwest are reporting a reasonably sharp upturn in business conditions. Firms in the South are reporting a modest increase, but the firms in the West report a very modest decline.

As a sign of an improving housing sector, the AIA residential index was 55.9 for November.

"This index has been above 55 for four straight months, a level of growth not seen since late 2005, near the end of the housing boom," he said. "The commercial/industrial index also moved back into growth territory. This sector, together with the institutional sector, is both fragile enough and vulnerable to the fluctuations of the broader economy, particularly the federal budget and debt negotiations."

The Center for Econometric Modeling Research at IU expects that, with the release of the fourth-quarter GDP, 2012 annual growth will close out at a smidge over 2 percent.

"The CEMR has baked the end of the payroll tax holiday and the relatively small tax hike for higher-income earners into their 2013 forecast and expects annual economic growth of about 1.8 percent. That certainly beats the alternative of doing a deep dive off the fiscal cliff," Slaper said. "For those who enjoy the economic roller coaster of economic uncertainty and political standoffs, however, there should be plenty of opportunity to enjoy a stomach-wrenching ride through the first half of the year.

"In sum, barring another Eurozone flare-up, a hard landing in China or other international crises over nuclear fuel processing or deserted islands, the resurgent auto sector and housing market in the U.S. will continue to fuel steady but modest economic growth."

Drivers of change

The National Association of Home Builders/Wells Fargo Housing Market Index held constant in January at its December level of 47, the highest level the index has attained since April 2006.

"Builder confidence has improved dramatically in recent months, and this stall marks the end of an eight-month growth streak in the index," Slaper said. "That said, it is generally perceived that the housing market continues to improve. Builders are seeing increased demand for new homes as inventories of foreclosed and distressed properties have begun to shrink."

Unfortunately, the Midwest housing index dropped this month, from 52 in December to 46 in January. However, interpreting this index is difficult as the regional metrics vary quite a bit from month to month.

The Institute for Supply Management's Purchasing Managers Index bumped back up into expansion territory, rising from 49.5 to 50.7.

"The PMI has been hovering around 50, or put another way, has been on the bubble, since May," Slaper said. "This signals that the manufacturing has not made an unambiguous step toward either expansion or contraction."

December auto sales remained above the 15 million units mark at a seasonally adjusted annual rate, although they did pull back a bit from November's figure. Year-to-date sales are up almost 13 percent. In addition to strong auto sales, the auto-sector component for the LII ratcheted a gain. Unfilled orders for motor vehicle bodies, parts and trailers grew by about half a percent.

The transportation and logistics component of the LII -- the Dow Jones Transportation Average -- recorded its third consecutive month of gains, rising 3.7 percent in December and putting upward pressure on the LII.

About the Leading Index for Indiana
The LII, developed by the Indiana Business Research Center, is designed to reflect the unique structure of the Indiana economy. It is a predictive tool that signals changes in the direction of the economy several months before the economy has changed. In contrast to economic forecasts, which use sophisticated statistical models to foretell particular levels for a wide variety of economic activities and outcomes in the future, a leading index is a simple construct that indicates a general direction of future economic activity expected in the next five to six months.