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Timothy Slaper
Indiana Business Research Center

George Vlahakis
University Communications

Last modified: Friday, June 17, 2011

IU Kelley School's Leading Index for Indiana for May suggests a "wobbly" recovery

June 17, 2011

BLOOMINGTON, Ind. -- According to the Leading Index for Indiana (LII) in May, prospects for the state's economic recovery would seem more tenuous.

LII May 2011

"The recovery looks increasingly wobbly," said Timothy Slaper, director of economic analysis at the Indiana Business Research Center (IBRC) in Indiana University's Kelley School of Business, which reports the monthly report.

The LII fell nearly a half point to 96.4 this month, giving up all its gains from the fall of 2010.

Other economic indicators also showed a slowdown in the 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 0.9 percent in May on the heels of a 0.5 percent decline in April.

"Based on the movements of the PCI and the LII, it looks like the economy is stuck in idle," Slaper said.

The automotive sector slowed down as well. Compared to June 2010, dealership floor traffic in the first weeks of June 2011 dropped 5.9 percent. By contrast, May's year-over-year change in floor traffic was a 9.3 percent increase. CNW Research also reported that their "Jitters Index," which increased 1.7 percent month-over-month in May, also rose in June.

Tim Slaper

Timothy Slaper

Print-Quality Photo

"Moreover, it looks like credit terms are also tightening -- the percentage of sub-prime car loan approvals fell in the first two weeks of June. This is the first month-over-month decline in sub-prime approvals since February 2010," he noted.

On the brighter side, the LII's drop did not produce a "warning sign" that the economy has turned from growth to contraction and the early June release of the Thomson Reuters/University of Michigan index of Consumer Sentiment took an unexpected jump up.

Drivers of Change

Confidence in the housing market dropped in June, signaling that a recovery in housing is a long way off. The National Association of Home Builders' Housing Market Index (HMI) dropped from 16 -- essentially level for the past six months -- to 13. The HMI has yet to regain its post-recession high of 22 from May of last year, the last month of the federal homebuyer tax credit program.

The Institute for Supply Management's Purchasing Managers Index (PMI) was the big story this month, falling almost 7 percentage points from 60.4 to 53.5.

"Manufacturing activity is still growing, but sluggishly," Slaper said. "Such a dramatic decrease suggests a significant slowdown."

The drop leaves the PMI at its lowest level since September 2009. Manufacturers are also concerned about the cost side. Slaper noted that one producer commented that "demand remains strong; however, inflation is evident everywhere in virtually every material purchased."

The Dow Jones Transportation Average (DJTA) dropped 0.8 percent in May, from 5,515 to 5,470, a relatively tame drop compared to the change in the PMI. The DJTA is still up 8.8 percent from its January value, a sign that the market still sees the economy on an upward trajectory.

The indicator for the auto sector -- unfilled orders for motor vehicles and parts -- fell in April, and the Census Bureau revised March's figure down as well. May's auto sales also disappointed. From a seasonally adjusted annual rate of sales in April of 13.2 million units, May's sales did not even hit the 12 million unit mark. Compared to last year, May's sales were off 3.9 percent.

Interest rates on 10-year Treasuries fell from 3.46 to 3.17 percent in May, driving down the interest rate spread portion of the LII, slightly. As part of the Federal Reserve's QE2 program, the federal funds rate has remained near zero since the financial crisis. In May, the federal funds rate fell to 0.09 percent, surpassing April's rate of 0.1 percent as the rate's lowest level since at least 1954, the earliest year for which data are available. Many are wondering if the Fed will continue this accommodative monetary policy once QE2 expires this month.

Last month, the Consumer Price Index registered a 3.6 percent year-over-year increase. As a result, the real 10-year Treasury interest rate is now negative.

"This means that anyone investing in 10-year Treasury bonds is actually losing value to inflation," Slaper said. "Negative real interest rates are frequently cited as one of the causes of the housing bubble that precipitated the financial crisis."

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.