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Timothy Slaper
Indiana Business Research Center

George Vlahakis
University Communications

Anne Auer
Kelley School of Business

Last modified: Thursday, January 21, 2010

Leading Index for Indiana continues 'unenergetic climb,' but better than a year ago

Jan. 21, 2010

BLOOMINGTON, Ind. -- While the Leading Index for Indiana (LII) for December continues "its unenergetic climb," for the first time since its release in October of last year, the state economic indicator was higher than it was a year earlier.

Leading Indicators, Dec. 2009

The LII, produced by the Indiana Business Research Center at Indiana University's Kelley School of Business, increased by 0.2 in December to 96.4. The index limped up in November and improved at a slightly faster pace in December.

Timothy Slaper, director of economic analysis at the IBRC and director of the index project, said several factors contributed to a stronger rise more recently, including an up-tick in the Dow Jones Transportation Average, the continued large interest rate spread and a strong up-tick in the purchasing managers' index. Other components of the index are lagging behind, especially the sentiment of home builders, he said.

The movement of the LII corroborates with the 2010 economic forecast from the Center for Econometric Modeling and Research (CEMR) at IU.

"In contrast to a 'V' shaped rebound, the CEMR forecasted a 'U' shaped economy recovery for the United States in general and Indiana more specifically," Slaper said. "The large revision downward in the national Gross Domestic Product statistic from the initial release in October to the latest release seems to indicate a wobbly recovery."

Drivers of change

Citing the large number of foreclosed homes for sale and a job market that refuses to improve, home builder confidence declined last month. Tight lending conditions for both consumers and home builders continue to pose considerable obstacles for a robust recovery. The housing market index (HMI) declined in each of the four regions. The national HMI fell to its lowest point since June of last year.

On the other hand, the Dow Jones Transportation Average (DJTA) made sturdy progress in both November and December.

The Purchasing Manager Index (PMI) produced by the Institute of Supply Management (ISM) made significant upward progress, regaining the ground it lost the previous month, plus a little more. The PMI has been erratic over the last several months, but overall, the index continues to point to an economy in expansion and has been on an upward trend since the beginning of 2009.

"The Federal Reserve has had an aggressive money policy that is keeping the federal funds rate at close to zero. Those who are on the lookout for inflation see this as a recipe for a weakening dollar and future inflation," Slaper said. "On the other hand, production levels continue to be well below capacity and unemployment high. As a result, many economists do not consider cost-push inflation a short-to-medium term threat.

"The large interest rate spread can be seen as a signal for a better than expected 2010," Slaper added. "When it was inverted or flat for most of 2006, 2007 and the early part of 2008, it correctly foretold of the future economic disaster."

The auto sector component of the index was essentially flat. Shipments and unfilled orders over the last few months have not rebounded strongly. The sector has a long way to go before it can close the gap between "normal sales" and current levels of production. Shipments of motor vehicles and parts in 2009 were about 25 percent lower than in 2008.

Automobile sales forecasts for 2010 have been revised upward recently, but they still remain gloomy. "Normal" output in the auto sector is not anticipated any time soon, Slaper said, noting that some auto industry analysts predict that 2010 sales may not hit 12 million units. At that level, sales would fall about 4 million units per year less than in 2006 and 2007.

About the Leading Index for Indiana
The LII 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.