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Timothy Slaper
Indiana Business Research Center

George Vlahakis
University Communications

Last modified: Thursday, May 19, 2011

Kelley School's Leading Index for Indiana suggests a 'feeble' economic recovery through early fall

May 19, 2011

BLOOMINGTON, Ind. -- Based on the Leading Index for Indiana (LII), the state's feeble economic recovery will continue through the summer and early fall.

The LII has remained essentially flat in the first four months of 2011. In April, the LII declined a tenth of a point, from March's revised value of 97.3 down to 97.2.

The LII is produced each month by the Indiana Business Research Center (IBRC) in Indiana University's Kelley School of Business.

LII April 2011

Other economic indicators also indicate a tepid recovery. The Ceridian-UCLA Pulse of Commerce Index™ (PCI), a real-time measure of the flow of goods to U.S. factories, retailers and consumers, fell 0.5 percent in April, following a 2.7 percent leap in March. The PCI's authors note that the outlook for GDP in 2011 is "good, not great."

On the positive side, measures of consumer confidence improved recently. Both the Thomson Reuters/University of Michigan consumer sentiment index (May 13 release) and the Conference Board Consumer Confidence Index (April 26 release) increased.

"The automotive sector, however, is sending mixed signs," said Timothy Slaper, director of economic analysis at the IBRC. "April sales registered a seasonally adjusted annual rate of 13.2 million units, nearly 18 percent higher than April 2010. Compared to May 2010, dealership floor traffic rose 9.3 percent, but this is slower than the 12.2 percent year-over-year increase from a month prior."

Slaper added that CNW Research's "Jitters Index," which had been falling in recent months, increased 1.7 percent. "The jitters index measures concerns about home-centric issues like fuel and food prices, as well as taxes. Down is good for sales; up is bad," he explained.

Drivers of Change

"Confidence among home builders is stuck in a mire," Slaper said, noting that the National Association of Home Builders' Housing Market Index (HMI) has hovered at 16 for six out of the past seven months. "The HMI remains well below its post-recession high of 22 in May of last year; that value coincided with the end of the federal homebuyer tax credit program."

The regional HMI results tell a similar story. The Midwest regional index did not change, remaining at 14. By contrast, the Northeast index fell 5 points, the West index rose 2 points and the South index rose 1 point.

Tim Slaper

Timothy Slaper

Print-Quality Photo

The Institute for Supply Management's Purchasing Managers Index (PMI) fell again in April, dropping 0.8 points.

"Nevertheless, manufacturing activity continues to expand, with the PMI staying above 60 for four consecutive months," Slaper said. "Respondents to the survey expressed strong concern about the rising costs of raw materials, and one mentioned that customers are trying to 'buy ahead of material price increases.'"

The Dow Jones Transportation Average (DJTA) rose more than 4 percent in April, from 5,300 to 5,515, providing some positive counter balance to the slight retreat of the HMI and PMI. The DJTA is up 9.7 percent from its January value of 5025.

The indicator for the auto sector -- unfilled orders for motor vehicles and parts -- edged up in March and the Census Bureau revised February's value upward.

"These data suggest that the long-lagging auto supply chain may be picking up steam," Slaper said. "But then again, pent up demand, according to CNW Research, is over 41 percent higher than last year. This may be showing that buyers are hesitant to purchase a vehicle when gasoline prices are on the rise."

Interest rates on 10-year Treasuries rose by 5 basis points to 3.46 percent in April, after falling back the previous month. While the federal funds rate has remained near zero since the financial crisis, in accordance with the Federal Reserve's accommodative monetary policy, in April the federal funds rate fell another 4 basis points to just 0.1 percent, its lowest level since at least 1954, the earliest year for which data are available.

"Given that the Consumer Price Index registered a 3.1 percent year-over-year increase last month, the real federal funds rate is in solidly negative territory," Slaper explained. "The real 10-year Treasury rate of interest is very close to 0.0 percent.

"Negative real interest rates are often cited as one of the causes of the housing bubble that precipitated the financial crisis. This time, however, excess liquidity seems to be flowing into commodities and stocks, rather than housing," he added.

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.