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Timothy Slaper
Indiana Business Research Center

George Vlahakis
University Communications

Last modified: Friday, July 22, 2011

IU's Leading Index for Indiana reports tiny gain; state's economic recovery 'still gasping for air'

July 22 2011

BLOOMINGTON, Ind. -- The Leading Index for Indiana (LII) edged out a tiny gain in June, after several months of reporting neutral or negative movement.

LII June 2011

Following a steep decline in May, the LII rose just a tenth of a point in June, from 96.4 to 96.5.

"The LII's latest move is further evidence that the economic recovery is still gasping for air," said Timothy Slaper, director of economic analysis at the Indiana Business Research Center (IBRC) in Indiana University's Kelley School of Business, which reports the monthly report.

Other economic indicators are somewhat more positive. The Ceridian-UCLA Pulse of Commerce Index™ (PCI), a real-time measure of the flow of goods to U.S. factories, retailers and consumers, rose 1 percent in June following a 0.9 percent decline in May.

In contrast, the Thomson Reuters/University of Michigan index of Consumer Sentiment plummeted in June on fears related to unemployment, inflation, falling property values and concerns about the national debt.

"The automotive sector did not offer much good news either," Slaper said. "Early returns for July floor traffic show a slight drop from June. Combined with the small rise in the 'Jitters Index,' July is looking to be a mediocre month."

Tim Slaper

Timothy Slaper

Print-Quality Photo

CNW Research also reports that credit terms are also tightening -- the percentage of sub-prime car loan approvals in early July are down more than 3 percent versus June.

Drivers of Change

Confidence in the housing market rose in July, but did not fully reverse its June drop. The National Association of Home Builders' Housing Market Index (HMI) had dropped from 16 to 13 in June, but recovered to 15 in July. The HMI has yet to regain its post-recession high of 22 from May of last year, but there are reports that select markets are showing gradual improvement as consumers begin to take advantage of favorable buying conditions.

The Institute for Supply Management's Purchasing Managers Index (PMI) rose this month, reversing a portion of May's precipitous decline. The index had fallen from 60.4 to 53.5 in May, but rose back to 55.3 in June.

"This reversal has alleviated some fears that May's drop indicated a significant slowdown in manufacturing activity," Slaper said. "Inventories grew substantially in June, which is especially significant as they had been reported as contracting the previous month. Manufacturers are still expressing concern over commodities prices and the state of the housing market."

The indicator for the auto sector -- unfilled orders for motor vehicles and parts -- rose in May. The Census Bureau also revised April's figure up, indicating positive movement in the motor vehicles component of the LII.

"June's auto sales were not encouraging, however," Slaper noted. "On a seasonally adjusted annual rate, June's sales fell well short of 12 million units, making June the lowest sales volume month so far this year."

According to CNW Research, auto manufacturers and dealers have responded by increasing their incentives.

June looked a lot like May for the Dow Jones Transportation Average (DJTA), which dropped from 5,470 to 5,424. The 0.8 percent drop in June equaled May's percentage drop. Despite the recent downward pressure, the DJTA is still up 7.9 percent from its January value, a sign that the market still sees the economy on an upward trajectory.

Interest rates on 10-year Treasury notes fell from 3.17 to 3 percent in June, slightly driving down the interest rate spread portion of the LII. Last month, the Consumer Price Index registered a 3.6 percent year-over-year increase. As a result, the real 10-year Treasury interest rate is now negative.

Negative real interest rates are frequently cited as one of the causes of the housing bubble that precipitated the financial crisis.

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.