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Last modified: Friday, March 18, 2011

Leading Index for Indiana sees first fall since August 2010, signaling rocky recovery ahead

March 18, 2011

BLOOMINGTON, Ind. -- After five months of consecutives climbs, the Leading Index for Indiana (LII) hit a speed bump in February. The LII dipped for the first time since August 2010, moving from 97.4 as initially reported in January to 97.2 in February. This month is a reminder that it will be a rocky road to recovery.

LII Feb. 2011

Consumer sentiment hit a giant speed bump, as the most recent Reuters/University of Michigan consumer sentiment index registered its biggest decline since the financial crisis began in late 2008, tumbling from a post-recession high of 77.5 in February to 68.2 in March.

Recession periods usually see sentiment readings in the 70 range so March's readings seem to show that many Americans now think that the U.S. economy has taken a dramatic turn for the worse. Sharply higher gasoline prices are weighing on Americans and stories about another "oil shock" are taking their toll on consumer's expectations. The expectations index plunged more than 13 points, from 71.6 to just 58.3.

Other economic indicators also hesitated in February. The Ceridian-UCLA Pulse of Commerce Index™ (PCI), a real-time measure of the flow of goods to U.S. factories, retailers and consumers, fell 1.5 percent in February on the heels of a 0.3 percent decline in January. Just the same, February marked the 15th consecutive month of year-over-year growth in the index. The PCI's authors insist that, despite the PCI's recent dip, their outlook for 2011 is for "GDP to grow at the historically 'normal' rate of 3 percent, accompanied by a persistent level of high unemployment."

On the brighter side, the retail side of the automobile sector posted encouraging numbers this month. In the opening days of March, dealership floor traffic was up nearly 14 percent compared to March 2010. Based on early March activity, CNW Research ( anticipates the sales could approach 1.2 million units—12.9 million units on an annual rate. The recent earthquake and tsunami in Japan is the wildcard for the auto sector in the coming months as Japan supplies many critical auto components to vehicles assembled in the United States, as well as completed vehicles.

Drivers of Change

After four consecutive months in the doldrums, homebuilder confidence improved by a single point in March, rising to 17. This is the highest level the HMI has reached since May 2010, when the survey period corresponded with the final days of the federal home buyer tax credit program.

Builders indicated somewhat increased optimism about the future with a two-point gain in the HMI component gauging sales expectations for the next six months. This more hopeful perspective reflects the fact that several economic indicators show enough improvement in the overall economy to generate modest housing market gains later in the year.

Regionally, HMI results were mixed. While the Northeast posted a 1 point decline to 20, the Midwest held flat at 12, the South gained 2 points to 20 and the West gained 4 points to 17.

The Institute for Supply Management's Purchasing Managers Index (PMI) rose 0.6 points in March, on top of a 2.3 point jolt in February, showing that the manufacturing industry continues to expand at an increasing rate. As with February, this marks the highest PMI value since May 2004. As in previous months, respondents continue to express concern about global demand driving up the price of commodities that manufacturers use as inputs.

The Dow Jones Transportation Average (DJTA) rose in February, from 5025 to 5085, but this marginal upward movement in the DJTA was not enough to push the LII into positive territory.

After several months of steady progress, unfilled orders for motor vehicles and parts reversed course in January. In addition, the Census Bureau revised the December unfilled orders number downward, resulting in a January 2011 LII that was not only revised downward, but weakened slightly relative to December 2010. Nevertheless, the measure is still well above its July 2010 low and should continue upwards as the auto sector improves.

The effects of the earthquake and tsunami in Japan may result in tectonic shifts in the automobile sector. If auto supply is severely disrupted, manufacturers may see deterioration in their brand loyalty and sales lost to other auto makers that were not as affected by supply disruptions. For example, CNW Research has measured the effects of having to wait 90 days for the delivery of a vehicle on brand loyalty. For example, 14 percent of Toyota and 19 percent of Nissan customers would be unwilling to wait 90 days for their preferred vehicle.

Interest rates on 10-year Treasuries rose in February for the fourth consecutive month. The federal funds rate remains near zero in accordance with the Federal Reserve's continued policy of cheap money. As a result, the five-month moving average of the spread between the two interest rates—the measure used in the LII—increased in February, putting downward pressure on the LII.

Data Revisions

The historical series for the LII also reflects regular monthly revisions in source data, more specifically, the value of unfilled orders for motor vehicles and parts, reported by the Census Bureau. The Census Bureau regularly revises these data and as the case this month, those revisions can greatly affect the LII in previous months. Not only was the January 2011 LII revised downward, but, in contrast to the press release, the revised LII retreated a sliver. In addition, the National Association of Home Builders/Wells Fargo intermittently revises the Housing Market Index. As a result, users should be aware that historical values of the LII can change slightly and users should update their historical time series accordingly.

The ISM recently revised its PMI from January 2007 to the present as a result of the U.S. Department of Commerce recently completing its annual adjustment to the seasonal factors used for economic data. Seasonal adjustment factors are used to allow for the effects of repetitive intra-year variations resulting primarily from normal differences in weather conditions, various institutional arrangements, and differences attributable to non-movable holidays. Economists and market watchers who track the ISM indexes should be aware of these changes that took effect with the February 1, 2011 release of the PMI and the February 3, 2011 release of the ISM Non-Manufacturing Report On Business. For more information, visit the ISM website at:

The 2011 release schedule for the LII, as well as historical data, can be found at

The LII was developed for Hoosier businesses and governments to provide a signal for changes in the general direction of the Indiana economy. In contrast to The Conference Board's Leading Economic Index and other indexes that are national in scope, the LII uses national level data for key sectors that are important to the Indiana economy. The reason the LII uses national level data is because national data are more timely than state-level data.