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Timothy Slaper
Indiana Business Research Center

George Vlahakis
University Communications

Last modified: Tuesday, April 20, 2010

Leading Index for Indiana posted gains in March

April 20, 2010

BLOOMINGTON, Ind. -- The Leading Index for Indiana (LII) sprung back to life in March.

After a late-winter slump, the latest report shows that the LII reclaimed the territory that it lost in January and February and gained a little bit more.

LII March 2010

Timothy Slaper, director of economic analysis at the Indiana Business Research Center at IU's Kelley School of Business. said the index's movement reflects the generally good economic news recently. The direction and strength of the LII's movement in March is consistent with a the slow recovery that is expected over the next few months.

"Most economic indicators have pointed in the positive direction recently, but the strength of consumer demand remains the big question," Slaper said. "For example, the two foremost indicators of consumer attitudes about spending moved in the opposite directions this last month. Until the consumer comes back to stay, the economic recovery will be lethargic."

Drivers of Change

According to the National Association of Home Builders/Wells Fargo Housing Market Index (HMI), home builders have lost their winter blues. The index surged four points -- from 15 to 19 -- as consumers rushed to take advantage of home buyer tax credits set to expire at the end of the month. Regionally, the Midwest and South registered similar gains in the index.

"Home builders' view of the marketplace brightened with a favorable start to the spring home buying season," Slaper said. "Their optimism is tempered, however, by the factors that continue to drag on housing -- including the critical shortage of credit for new and existing projects, problems with inaccurate appraisals, and the ongoing flow of foreclosed properties on the market."

The Dow Jones Transportation Average (DJTA) also moved higher in March, adding another 5 percent to the 6 percent DJTA gain in February.

According the Purchasing Manager Index (PMI), manufacturing also gained momentum. The Institute of Supply Management reports that, after losing about two points in February, the March PMI jumped three points. Moreover, the Inventories Index turned around, indicating growth for the first time after nearly four years of inventory liquidation.

"This is a sign that manufacturers may be willing to increase their inventories, because they sense an uptick in economic activity," Slaper said.

The Federal Reserve continues its policy of keeping the federal funds rate at close to zero. The Treasury bill rate trended up in April. The result is that the interest rate spread hit historic highs and the current spread offers potentially encouraging news. Large spreads were also evident as the economy picked up speed out of the recessions in 1992 and 2003.

Based on this experience, some economy watchers argue that the current large spread is an indication that the recovery will be stronger than the "U" shaped recovery that dominates most economic forecasts, Slaper said.

The good news about auto sales in March is not reflected in the auto sector component of the index. Until February, the data series used in the LII -- unfilled orders of motor vehicles and parts -- has been essentially level. As a result, the auto sector did not contribute to the uptick in the LII in March. One can anticipate that the surge in car sales in March will be reflected in the order and shipments data in the coming months.

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.