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Timothy Slaper
Indiana Business Research Center

George Vlahakis
University Communications

Last modified: Friday, October 21, 2011

As it did a year ago, IU's Leading Index for Indiana gained some traction in September

Oct. 21, 2011

BLOOMINGTON, Ind. -- Just as it did a year ago, the Leading Index for Indiana (LII) gained some traction in September.

The LII inched up a tenth of a point in September and, with the upward revision of the same magnitude for August, stands at a value of 96.4. Those who followed the LII last year will notice that the movements from September 2009 to September 2010 nearly parallel the LII's movements over the last 12 months.

"If history repeats this fall, we would expect to see the LII recover some of the ground lost since the start of 2011, signaling tepid growth in the coming months," said Timothy Slaper, director of economic analysis at the Indiana Business Research Center (IBRC) in Indiana University's Kelley School of Business, which compiles the monthly report.

"One may be happy with tepid growth," Slaper added.

Based on the Ceridian-UCLA Pulse of Commerce Index (PCI), one could be pessimistic about future economic growth. The PCI, a real-time measure of the flow of goods to U.S. factories, retailers and consumers, produced far more negative results in September than did the LII. The PCI lost ground for the third month in a row, dropping 1 percent in September, on the heels of 1.4 percent and 0.2 percent declines in August and July, respectively. The index's authors note that with this most recent drop, their forecast for third quarter U.S. GDP growth has fallen to 0 percent.

In contrast, the news for the automotive sector was generally good. Early returns for October floor traffic were up a healthy 17.8 percent from September, and 3.3 percent above year-ago numbers.

"Consumers are still worried about the economy, however, as evidenced by the elevated 'Jitters Index' from CNW Research," Slaper observed. "This index rose by 7 percent from August to September, and changed little in October. Despite general unease over the nation's economic health, the Thomson Reuters/University of Michigan Consumer Sentiment index rose in September, indicating some improvement in the general malaise."

Drivers of Change

Confidence in the housing market rose in October to its highest level since the homebuyer tax credit ended in the spring of 2010. The National Association of Home Builders' Housing Market Index (HMI) jumped from 14 to 18 in October. Regionally, the West, the South, and the Midwest all registered substantial gains. The Northeast remained unchanged.

Tim Slaper

Timothy Slaper

Print-Quality Photo

While this move is a positive sign, the index remains very low. "Homebuilders are caught in a price-cost wedge," Slaper said. "They face downward price pressure from foreclosed homes but at the same time, the cost of building materials is rising, squeezing already tight margins."

The Institute for Supply Management's Purchasing Managers Index (PMI) rose as well in September, from 50.6 to 51.6, moving away from the knife-edge 50 level. Below 50 signals a manufacturing sector in retreat.

"Despite some changes in the rate of growth, the PMI has now signaled an expanding manufacturing sector for 26 consecutive months," Slaper said. "Most of the components of the PMI sat above or near the 50 level this month. The general consensus among survey respondents seems to be that production so far has been good, but the outlook for future demand is worrisome."

Unfilled orders for motor vehicles and parts -- the indicator for the auto sector -- saw an increase in August on top of upwardly revised numbers for June and July. Unfilled orders are now at their highest level since October 2009, a continuing reversal of a very long downward trend. September auto sales were also on the brighter side -- nearly 10 percent from the same month last year, coming in at 13.1 million units at a seasonally adjusted annual rate.

The Dow Jones Transportation Average plunged again in September, along with the rest of the stock market. The DJTA dropped from 4,667 to 4,189, a decline of more than 10 percent. Combined with the decline in August, the DJTA has lost nearly 20 percent since July. The European debt crises and fears of a potential double-dip recession have undermined investor confidence in recent months.

Interest rates on 10-year Treasuries dropped again in September, falling from 2.3 percent to 1.98 percent, its lowest level in at least 50 years.

"As a result, the interest rate spread portion of the LII shrank, as the Fed Funds rate held near 0 percent," Slaper said. "This contributed to the LII's upward movement."

The Federal Reserve recently announced that it intends to keep the Fed Funds rate at this historically low rate for another two years in order to avoid a double-dip recession. The drop in Treasury rates does not bode well, however, as a drop in rates indicates an increased demand for safe securities and a decreased demand for risky assets like stocks.

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.