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Timothy Slaper
Indiana Business Research Center

George Vlahakis
IU Communications

Last modified: Friday, September 21, 2012

IU Kelley School's Leading Index for Indiana 'ambivalent' in September but edged up slightly

Sept. 21, 2012

BLOOMINGTON, Ind. -- The Leading Index for Indiana, defying the generally poor economic news, edged up slightly in September, moving from 99.5 in August to 99.7 this month.

Leading Indicators September 2012

"While every other component of the LII was slightly negative, the continuing improvement in home builder sentiment was sufficient to move the index upward. Given the LII's slight gyrations in the last several months, the LII appears to be, as Yogi Berra might say, 'ambivalent both ways,'" 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.

"The only mover on the positive side was the report from the housing market indicating that home builders are more confident about their future prospects," Slaper added. "The latest data from the Census Bureau may warrant guarded optimism. Housing starts increased to the second highest level since 2008 but, even still, missed economists' expectations. Building permits moderated as well in August, falling 1.0 percent during the month."

The LII in September tells much the same story as in previous months: inconsistent economic signals, an economy that has lost any mojo from earlier in the year, but an economy that does not yet appear to be on the precipice of a double-dip recession.

At least until one considers the risk of the fiscal cliff, a potential economic growth-killing combination of rising taxes and government spending cuts that is set to kick in Jan. 1 unless Congress acts to avoid it.

The Center for Econometric Model Research forecasts that, without the fiscal cliff, economic growth for 2013 would be about 2.3 percent, but if the economy is driven off the fiscal cliff, the economy is expected to shrink by about 0.5 percent in the first two quarters of 2013.

"The subpar employment growth in the last few months may be evidence that the economy has stalled," Slaper said. "Given the lack of economic momentum, any additional economic headwind -- like the fiscal cliff -- will tilt the national economy into recession."

Slaper noted one continuing bright spot for Indiana's economy: a relatively healthy auto sector. Car sales hit the 14.5 million-unit sales mark in August and were almost 20 percent higher than the same month last year. "While car sales were something to crow about, August's retail sales, excluding oil and gas, compared to July's revised sales numbers, fell below expectations," he added.

Tim Slaper

Timothy Slaper

Print-Quality Photo

"While the summer's auto sales picture was positive, unfilled orders for motor vehicle bodies, parts and trailers -- the component for the LII -- have been falling gradually, albeit declining less than 1 percent month-over-month. This almost imperceptible decline had no material effect on the LII," he explained.

Drivers of change

The expectations of home builders gave the LII another boost this month with the National Association of Home Builders' Housing Market Index increasing 3 points, from 37 in August to 40 in September. Unlike last month, however, the gains were shared across all four regions, with the Midwest increasing from 41 in August to 45 in September. The 3-point rise in the HMI was sufficient to give the LII lift.

While acknowledging comments from builders who believe that current sales conditions and consumer traffic suggest an improving outlook for the housing market, Slaper remains concerned about the fragile nature of the housing and economic recovery and suggests there are other significant headwinds that could slow growth.

The Institute for Supply Management's Purchasing Managers Index moved into the "economic contraction" zone in July and fell further in September to 49.6, putting downward pressure on the LII. A PMI reading of below 50 signals contracting economic activity in the manufacturing sector.

The transportation and logistics component of the index -- the Dow Jones Transportation Average -- deflated slightly more in August, retreating another 1.6 percent and putting downward pressure on the LII. The August "waste economic index" measure for rail traffic that tracks well with current economic output -- not future economic output like the LII -- was 15 percent lower compared to last year, an indication that third-quarter GDP will likely show an economy that has lost steam.

The Federal Reserve recently announced what some analysts and pundits are calling "QE infinity," or quantitative easing with no end in sight.

"This will provide the few remaining homeowners who qualify to refinance their house but haven't yet done so the incentive to refinance at historically low mortgage rates and juice the economy to full employment," Slaper added drolly. "The interest rate spread component of the LII is really a story about the behavior of the 10-year Treasury interest rate, given that the Federal Funds rate hovers near zero as part of stated Fed policy. The rate on 10-year Treasuries dropped again in August as it appears that investors are still looking for safe assets."

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.