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Timothy Slaper
Indiana Business Research Center

George Vlahakis
University Communications

Last modified: Thursday, October 29, 2009

Leading Index for Indiana unchanged for September due to slight dip in the auto sector component

Oct. 29, 2009

BLOOMINGTON, Ind. -- The Leading Index for Indiana (LII) for the month of September was unchanged from the August index. The August index, previously flat from July, was revised upward.

The LII is produced by the Indiana Business Research Center at Indiana University's Kelley School of Business, in order to help Hoosier businesses and governments better understand market conditions in the state.

Three of the five components that make up the LII edged up in September, but the slight dip in the auto sector component resulted in the composite index remaining flat.

There was evidence of improvement in the auto sector, however. The underlying data were revised upward for August and corroborate some of the revisions in the Chicago Fed Midwest Manufacturing Index (CFMMI) auto sector component. The August CFMMI auto component was revised to 55.2 from 49.9. The Chicago Fed reports that the auto sector production increased by 5.5 percent in the Midwest region in September.

The stable LII in September and the recent announcement of jobs gains in manufacturing in Indiana present a mixed economic picture.

Drivers of Change

"While the positive movement of the Housing Market Index (HMI) reported in September is good news, it appears that the expiration of the tax credit at the end of November is weighing on the minds of home builders," said Timothy Slaper, director of economic analysis at the IBRC and director of the index project.

The association that surveys home builders and reports the HMI states that builders are experiencing the effects of the expiring tax credit on their sales activity, since it would be virtually impossible to complete a new home sale in time to take advantage of the incentive. The association is requesting that Congress extend the tax credit to help shore up the wobbly home construction sector.

The Dow Jones Transportation Average (DJTA) continued its ascent in September, indicating improving prospects for transportation and logistics firms.

The Purchasing Manager Index (PMI) produced by the Institute of Supply Management dipped a bit in September after moving into positive territory in August. The reading is still above the 50 mark that indicates an expanding economy. Except for September, the PMI has made steady progress upward since January.

"The interest rate spread has a long history for indicating changes in the direction of the economy," Slaper said. "That said, several factors may make interpreting the spread difficult for the moment. These factors include an aggressive Federal Reserve policy to maintain an extremely low federal funds rate, the weakening dollar, the uncertainly regarding inflation and the response of international U.S. Treasury Securities holders to a rapidly escalating federal government deficit."

While the auto sector component of the index registered a decrease in August, the August data reported last month were revised upward. In September, unfilled orders for motor vehicles and parts fell 0.8 percent, but shipments moved up a sliver, 0.3 percent. The September 2009 value for unfilled orders was 18.0 percent lower than the 2008 value for the same month and the value for shipments was 28.6 percent lower.

About the Leading Index for Indiana
The LII is designed to reflect the unique structure of the Indiana economy and uses more timely national level data for key sectors that are important to 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 for economic activity.