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Timothy Slaper
Indiana Business Research Center

George Vlahakis
University Communications

Anne Auer
Kelley School of Business

Last modified: Thursday, February 18, 2010

Leading Index for Indiana languished in January

Feb. 18, 2010

BLOOMINGTON, Ind. -- The unenergetic progress shown by the Leading Index for Indiana (LII) over the last couple of months came to a stop in January.

LII January 2010

Two factors that would have contributed to a stronger rise in the LII, namely, the robust up-ticks in the purchasing managers index and the index of home builder's sentiment, were offset by a dip in the Dow Jones Transportation Average and no material movement in the auto sector component. As a result, the LII didn't change in January from December.

"Considering the 2010 economic forecast from the Center for Econometric Modeling and Research at Indiana University, the sluggish movement of the LII is no surprise," explained Timothy Slaper, director of economic analysis at the Indiana Business Research Center at IU's Kelley School of Business. "They forecast a U-shaped economic recovery for Indiana, with sustained economic and employment growth taking root in the middle of the year."

The LII is produced each month by the Indiana Business Research Center.

Slaper, who is director of the index project, said several factors that contributed to a rise in late 2009, including an up-tick in the Dow Jones Transportation Average, were not sustained in January.

Drivers of Change

Home builders are marginally more optimistic that the recovery in housing is taking hold. Regionally speaking, the index of home builders' sentiment rose by two points in the Midwest and South, while the Northeast and West each registered one-point declines.

The Purchasing Manager Index (PMI) produced by the Institute of Supply Management (ISM) jumped from 54.9 in December to 58.4 in January. "A PMI above 50 indicates that the economy is expanding and the 3.5 point bounce shows that the expansion is accelerating," Slaper said. "Also good news, the trend in the index has been positive for six months."

In contrast, the Dow Jones Transportation Average dipped about 5 percent, after making steady progress in both November and December.

The Federal Reserve continues its policy of keeping the federal funds rate at close to zero. "This policy is not expected to be reversed in the coming months as production levels continue to be well below capacity and unemployment remains high," Slaper said. "As a result, many economists do not consider this policy a short to medium term inflation threat."

The auto sector component of the index has been essentially flat. On the other hand, shipments and the value of new orders did show improvement in December.

The effects of Toyota's massive recall are not reflected in these December figures (or the LII). "The recall may continue to be a boon for the Detroit three in the coming months as they gain market share at Toyota's expense," he said. "That said, the auto sector has a lot of ground to cover to return to normal sales levels."

About the Leading Index for Indiana
The LII 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.