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Timothy Slaper
Indiana Business Research Center

George Vlahakis
IU Communications

Last modified: Tuesday, February 21, 2012

IU Kelley School's Leading Index for Indiana continued to show improvement in January

Feb. 21, 2012

BLOOMINGTON, Ind. -- The Leading Indicators for Indiana continued its upward march last month, reaching another post-crisis high in January by hitting the elusive 98.0 mark.

The LII shot up half a point, with January being the third consecutive month that all five of the economic index's components contributed positively to the outcome. The most promising sign this month came from the Housing Market Index, which showed a level of homebuilder confidence not seen since spring 2007.

"We aren't out of the woods yet," cautioned Timothy Slaper, director of economic analysis at the Indiana Business Research Center in Indiana University's Kelley School of Business, which compiles the monthly report.

He noted that the Ceridian-UCLA Pulse of Commerce Index did not fare nearly as well in January, falling 1.7 percent. The PCI is now down 2.2 percent from a year ago.

"This steep drop is likely attributable to the recent spike in oil prices, as the PCI tracks real-time diesel fuel consumption for over-the-road trucking," Slaper said.

Moreover, the Thomson Reuters/University of Michigan overall index of consumer sentiment fell to 72.5 in early February from January's 75.0. One in four families polled for the index reported declines in income in early February, and a separate survey released in late January by the Conference Board also indicated a pullback in consumer optimism partly because of income jitters.

The Conference Board Consumer Confidence Index, like the TR/UM index, had increased in December but retreated the following month.

"After large back-to-back gains in the final two months of 2011, consumer assessment of current business and labor market conditions turned more downbeat," Slaper said. "While consumers were more upbeat about employment, they were less optimistic about business conditions and their income prospects.

Tim Slaper

Timothy Slaper

Print-Quality Photo

"While the LII has shown steady progress, not all leading economic indicators point to robust growth in the coming months," he added.

Drivers of change

Confidence in the housing market rose for the fifth consecutive month in January, reaching pre-housing-crisis levels. The National Association of Home Builders' Housing Market Index jumped another 4 points this month, from 25 to 29, its highest value since May 2007.

"While the HMI has doubled since September and stands at the best it has been in four years, it is important to note that the index is still very low," Slaper said.

Among the things continuing to constrain the housing market are foreclosures that still compete with new home sales and appraisals coming in less than the cost of construction. Also, prospective home buyers are finding it difficult to qualify for a mortgage.

"Despite the fact that housing affordability is at the highest it has ever been in 20 years, overly restrictive lending conditions present significant obstacles to many potential homes sales, even with interest rates at historically low levels," Slaper said.

The Institute for Supply Management's Purchasing Managers Index rose for the third consecutive month in January, increasing from 53.9 to 54.1. The January reading marks the 30th consecutive month of manufacturing growth, as measured by the PMI. That said, the PMI has yet to regain all the ground it lost since June.

Auto sales picked up speed in January, topping 14 million units on a seasonally adjusted annual rate and more than 11 percent higher than January 2011. Unfilled orders for motor vehicles and parts -- the LII indicator for the auto sector -- increased in December to a level not seen since October 2009, when the unfilled orders measure was caught in a precipitous decline. Hopefully, this is the sign of a long-term rising trend.

While the Dow Jones Transportation Average is still below the April 2011 post-recession high, the index continued on its upward trajectory in a big way in January. The DJTA has increased by 27 percent since September.

Interest rates on 10-year Treasuries dipped a bit lower in January, from 1.98 percent to 1.97 percent, its lowest monthly level in at least 60 years. In addition, the Fed Funds rate rose a basis point, decreasing the interest rate spread by two basis points. There is little reason to think that this de minimis change would portend an economic shift in either direction. Given excess production capacity, generally low inflationary pressures and the delicate state of the recovery, the Fed has announced that its policy of maintaining low interest rates will remain in effect for an extended period.

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.