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Timothy Slaper
Indiana Business Research Center

George Vlahakis
IU Communications

Last modified: Friday, July 20, 2012

IU Kelley School's Leading Index for Indiana in July remains unchanged, raising concerns

July 20, 2012

BLOOMINGTON, Ind. -- For the second consecutive month, the Leading Index for Indiana remained unchanged at the level of 99.4. Simply put, it's much like the June report, but with more pessimism.

"As in June, the lack of movement in the LII can be attributed to strong countervailing forces. The positive push from the housing market was offset by negative pull from the manufacturing sector," said 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.

"With the exception of the recent housing market reports, nearly all of the economic data during the past month have been bad. In many cases, the data have fallen short of already low expectations, and their trend points downward," Slaper added. "Unfortunately, there is significantly more downside than upside risk. The latest news from Europe is not much comfort, and a deterioration of the situation there could push U.S. growth down very close to zero.

"Combine that with the looming 'fiscal cliff,' the political game of chicken eroding consumer and business confidence, and mounting economic problems in China, and it is not inconceivable that there will be a recession relapse next year."

The report noted that consumer sentiment is eroding. The Thomson Reuters/University of Michigan consumer sentiment index declined from a May reading of 79.3 to a final June reading of 73.2. While this is a significant decrease, the June 2012 figure is still above the June 2011 figure of 71.5. The survey's authors attribute much of the June decline to a drop in sentiment among households earning above $75,000 annually.

"The outlook continues to deteriorate as experts are downgrading their expectations for future economic growth," Slaper said. "Just this month, the IMF reduced their forecast for global economic growth in 2012 to 3.5 percent, which, with the exception of 2009, would be the slowest annual growth rate in the last decade."

The Architecture Billings Index saw more poor conditions last month, indicating a drop in design activity at U.S. architecture firms in June and suggesting upcoming weakness in spending on nonresidential construction projects.

Drivers of change

Housing market confidence popped in July, putting strong positive pressure on the LII. The National Association of Home Builders' Housing Market Index increased 6 points from 29 in June to 35 in July, its highest level since March 2007. This month marks the first time the HMI has topped 30 since the housing bubble burst. The regional indexes all rose, with the Midwest regional HMI moving up 3 points from 31 to 34.

Combined with the upward movement in other key housing indicators -- for example, housing starts were up 6.9 percent in June, and single-family permits were up 0.6 percent -- the HMI report adds to the growing evidence that the recovery in housing, while still fragile, may assume its customary role of leading the economy out of recession, or in the current case, prevent a relapse.

Auto sales also continued to surpass expectations in June, rising 22 percent above year-ago levels, with a seasonally adjusted annual sales rate of 14.1 million vehicles. Unfilled orders for motor vehicle bodies, parts and trailers dropped a bit in their latest reading but remain near post-recession highs. Unfilled orders have been steadily increasing since January 2010, a fair proxy for movement in the overall economy.

The transportation and logistics component of the index -- the Dow Jones Transportation Average -- gave the LII a boost, rising in June to reclaim most of the ground lost in May. The stock market has been swinging wildly lately due to global economic concerns.

The overwhelming countervailing force -- the negative pull -- on the LII was the Institute for Supply Management's Purchasing Managers Index. The PMI dropped from last month's level of 53.5 to 49.7 in July. Not only was the drop large, but a value below 50 indicates contracting economic activity. This month marks the first time the PMI has dipped below 50 since July 2009.

The interest rate on 10-year Treasuries dropped again in June, from 1.8 percent in May to 1.6 percent in June, its lowest level on record. The Fed Funds rate remained near zero as part of the Fed's stated policy, so the interest rate spread dropped even further. Rumors have circulated lately that the Fed may embark on another program of quantitative easing this summer if it views a threat to the fledgling recovery.

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.