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Timothy Slaper
Indiana Business Research Center

George Vlahakis
IU Communications

Last modified: Friday, February 22, 2013

IU Kelley School's Leading Index for Indiana rises but remains a mixed bag

Feb. 22, 2013

BLOOMINGTON, Ind. -- The Leading Index for Indiana, while rising slightly from its revised January level, looks to have lost its mojo in the closing months of 2012, leaving a mixed picture so far for 2013.

In February, the LII rose to 100.6 from January's revised reading of 100.4. The January index was revised downward by more than 0.3, a casualty of the revision to unfilled orders for motor vehicles and parts.

The LII components were split for February, with the Purchasing Managers Index and the Dow Jones Transportation Average providing lift and balancing the slide in the auto and housing components.

The Indiana Business Research Center in Indiana University's Kelley School of Business produces the economic index.

Consumer confidence rose recently, with the Thomson Reuters/University of Michigan's Consumer Sentiment Index exceeding expectations and rising to 76.3 this month from 73.8 in January. The gauge for consumer attitudes was projected to rise to 74.8.

"That said, consumers are facing some new financial pressures," said Timothy Slaper, director of economic analysis at the IBRC. "The payroll tax holiday is over, returning to its 2010 level of 6.2 percent from 4.2 percent. An American who earns $50,000 is now taking home about $83 a month less. Meanwhile, trips to the gas station are also becoming more expensive, leaving consumers fewer dollars for discretionary spending."

Also more upbeat were CEOs. The Conference Board Measure of CEO Confidence, which decreased in the third quarter, improved in the fourth quarter of 2012. The measure reads 46, up from 42 in the third quarter.

"Despite the cloud of uncertainty due to the prospects of tumbling down the fiscal cliff -- which, for the most part, did not happen -- CEO confidence improved in the final quarter of 2012," Slaper said. "Even still, CEO sentiment remains pessimistic by historical standards as a reading of less than 50 points reflects more negative responses than positive."

While corporate profits are at record levels as a share of GDP, small businesses are still struggling to turn a profit. Small-business-owner confidence continues to drag, according to the National Federation of Independent Business' Small Business Optimism Index. That index gained 0.9 points last month but failed to regain the losses caused by the fiscal cliff scare.

"With the bleak news that the economy contracted in the fourth quarter of 2012, it isn't any wonder that small firms expect their real sales volumes to fall, and few have plans to invest in new inventory or appreciably increase hiring," he said.

"The bleak advance report on fourth-quarter 2012 GDP shouldn't make one a nabob of negativity. The specifics of fourth-quarter economic performance were consistent with the slow growth forecasts of the Center for Econometric Model Research," Slaper added.

While the negative direction of exports, inventory accumulation and federal spending on defense accounts for the 1.4 percent negative swing in GDP growth from the Center for Econometric Model Research forecasts, there were elements of better-than-expected performance by private-sector spending. Even in the face of disruption from Hurricane Sandy and the uncertainty surrounding the impending fiscal cliff, each of the components of private domestic demand exceeded Center for Econometric Model Research estimates.

"Thus, while the top-line GDP numbers for the next couple of quarters may be unsettling, the recovery remains well established," Slaper said. "Even though the current slow growth forecast may seem pessimistic in the short run, the private-sector outlook has improved over the past three months. After the third quarter of 2012, the underlying strength in the private sector becomes more apparent, and growth is expected to rise toward 3 percent."

Drivers of change

The National Association of Home Builders/Wells Fargo Housing Market Index was virtually unchanged in February. Following solid gains over the past year, builder confidence has essentially leveled out. This is partly due to ongoing uncertainties about job growth and consumer access to mortgage credit. Three-month moving averages for each region's HMI score were mixed, with the Northeast up three points to 39, the West up four points to 55 and the Midwest and South each down two points, to 48 and 47, respectively.

The Institute for Supply Management's Purchasing Managers Index registered 53.1 percent -- an increase of 2.9 percentage points from December's seasonally adjusted reading of 50.2 percent -- indicating expansion in manufacturing for the second consecutive month.

The New Orders Index registered 53.3 percent, an increase of 3.6 percent over December's seasonally adjusted reading of 49.7 percent, indicating growth in new orders. Manufacturing is starting out the year on a positive note, with all five of the PMI's component indexes -- new orders, production, employment, supplier deliveries and inventories -- registering above 50 percent in January.

January's auto sales maintained their 15-million-plus sales rate, beating last year's first-month sales by more than 14 percent. While the sales picture was bright, the auto component in the LII -- unfilled orders for motor vehicle bodies, parts and trailers -- fell by 2.7 percent. December's revision to this series resulted in a noticeable downward revision in the LII for last month.

For the fourth consecutive month, the transportation and logistics component of the LII -- the Dow Jones Transportation Average -- helped to pull up the LII, rising 9.0 percent in January.

As mentioned before, the interest rate spread is something of a zombie component of the LII. With current Fed policy, the spread does little to indicator the direction or strength of future economic activity in the state.

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.