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Timothy Slaper
Indiana Business Research Center

George Vlahakis
IU Communications

Last modified: Thursday, March 22, 2012

IU Kelley School's Leading Index for Indiana taps the brakes after recent spike in oil prices

March 22, 2012

BLOOMINGTON, Ind. -- After five consecutive months of steady increases, the Leading Index for Indiana paused in March, remaining unchanged at 98.0. A couple of the economic index's components declined slightly.

The Ceridian-UCLA Pulse of Commerce Index, another economic indicator, showed some mild signs of improvement, increasing 0.7 percent in February. However, the PCI remains down 0.2 percent from a year ago.

"This stalled growth is likely attributable to the recent spike in oil prices, as the PCI tracks real-time diesel fuel consumption for over-the-road trucking," 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.

Less encouraging was the Thomson Reuters/University of Michigan overall index of consumer sentiment, which fell to 74.5 in early March from February's level of 75.3.

"This is especially concerning as Reuters reports that economists were expecting a March increase, rather than a decline. Inflation, and gas prices in particular, seem to be weighing heavily on consumers' minds," Slaper added. "The LII has shown progress in recent months, but this latest halt in its upward trajectory reminds us that the recovery continues at a gradual pace and is still fragile."

Drivers of change

After five consecutive months of increases, confidence in the housing market held its ground this month but did not score any more gains. The National Association of Home Builders' Housing Market Index remained unchanged from a revised February number of 28, its highest level since June 2007. While the HMI has doubled since September and stands at the best it has been in four years, it is important to note that the index is still low historically.

Slaper noted comments by NAHB Chairman Barry Rutenberg, who observed that "there is a sense that many local housing markets have started to move in the right direction and that prospects for future sales are improving." However, tight credit markets also are keeping the pace of new home construction down.

The Institute for Supply Management's Purchasing Managers Index sagged in February, falling from 54.1 to 52.4.

"Any number of 50 indicates growth in the manufacturing sector, and the drop follows three consecutive months of increases," Slaper said. "Thus the outlook for manufacturing is still fairly positive."

Auto sales have shown some positive signs over the past few months as well. Year-to-date car sales are up 22.5 percent from last year, and February car sales broke the 15 million unit barrier, at a seasonally adjusted annual rate.

"Of particular interest, it appears that Chrysler is picking up market share, about 2.2 percent since last year," Slaper said. "This may be an indicator that Midwest auto manufacturing is beginning to come back. Despite the positive news in the sector, unfilled orders for moving vehicles and parts (the LII component for the auto sector) dipped slightly in January."

The Dow Jones Transportation Average also gave up ground in February, falling from 5,319 to 5,153 -- a drop of more than 3 percent.

The interest rate on 10-year Treasuries remained unchanged from January to February at 1.97 percent, its lowest monthly level in at least 60 years. The Fed Funds rate remained near zero as part of the Fed's stated policy, so the interest rate spread did not change. Given excess production capacity, generally low inflationary pressures and the delicate state of the recovery, the Fed has announced that its policy of maintaining low interest rates will remain in effect for an extended period.

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.