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Timothy Slaper
Indiana Business Research Center

George Vlahakis
IU Communications

Last modified: Monday, August 20, 2012

Housing market gains help IU Kelley School's Leading Index for Indiana to rise slightly in August

Aug. 20, 2012

BLOOMINGTON, Ind. -- After pausing for a couple of months, the Leading Index for Indiana moved timidly upward, from 99.4 in July to register 99.6 in August.

LII August 2012

"This reluctant step up was driven almost exclusively by the positive news from the housing market, namely, that home builder sentiment continues to improve," 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.

"Most other components of the index were essentially flat," Slaper added. "The conflicting signals in the components of the LII mirror the inconsistent economic signals in the broader economy. For example, housing starts fell slightly from June to July while building permits -- a signal of future construction -- rose. Both measures were significantly greater than the same period a year ago however."

While the advance retail sales numbers for the month of July were encouraging, consumer sentiment is still in the doldrums, with the Thomson Reuters/University of Michigan consumer sentiment index registering a July value of 72.3. This is down from a June reading of 73.2. The Conference Board Consumer Confidence Index, on the other hand, improved slightly in July.

"While the jobs report earlier this month was a pleasant surprise -- the economy added more jobs than most analysts had predicted -- the recent run-up in gasoline prices, due to both rising crude oil prices and domestic production disruptions, will erode the consumer spending that helps to drive the economy," he said.

This will also prolong the period of many households paying off consumer debt.

"Even with the sheepish step forward of the LII, the overall outlook calls for economic growth that is below modest," he said. "The economic expansion slowed to almost 'stall speed' in the first half of the year, and there is little indication in the recent data that the economy has regained traction."

The bright spot for the Indiana economy, however, is that car sales continue to exceed the 14 million unit sales mark, helping to bolster the state's economic fortunes somewhat.

Tim Slaper

Timothy Slaper

Print-Quality Photo

"The outlook continues to deteriorate as experts are downgrading their expectations for future economic growth," Slaper said. "Just this month, the IMF reduced its forecast for global economic growth in 2012 to 3.5 percent, which, with the exception of 2009, would be the slowest annual growth rate in the last decade."

The Architecture Billings Index saw more poor conditions last month, indicating a drop in design activity at U.S. architecture firms in June and suggesting upcoming weakness in spending on nonresidential construction projects.

Drivers of change

Housing market confidence continued to rise in August, providing the oxygen to move the LII forward. The National Association of Home Builders' Housing Market Index increased 2 points from 35 in July to 37 in August. These levels haven't been seen since early 2007. The enthusiasm should be guarded however, Slaper said.

The HMI index rise is attributed to an increase in the regional index for the South and a large increase in the Midwest regional index -- soaring 8 points from 34 in July to a preliminary reading of 42 in August. The other two regional HMI indexes, for the Northeast and West, both fell from July to August. The value of the Northeast regional HMI plummeted from 34 in July to a preliminary reading of 25 in August.

After dropping almost four points and moving into "economic contraction" territory in July, the Institute for Supply Management's Purchasing Managers Index eked out a 0.1 point gain in August. The PMI remains below 50, signaling contracting economic activity. The Production Index and the Employment Index components of the PMI remained in economic growth zone, however, registering 51.3 percent and 52 percent, respectively.

Auto sales stayed on track to surpass the 14 million unit mark for the year. July sales were almost 9 percent greater compared to last year. Unfilled orders for motor vehicle bodies, parts and trailers edged up almost imperceptibly. Unfilled orders have been steadily increasing since January 2010, a fair proxy for movement in the overall economy.

The transportation and logistics component of the index -- the Dow Jones Transportation Average -- continues to seesaw. In July, it retreated about 2.3 percent, closing the month at almost the same value as it closed in May. U.S. rail traffic was also off in the month of July, compared to last year. While overall rail traffic was merely 0.7 percent lower, the "waste economic index" measure for rail traffic was 6.0 percent lower compared to last year.

Given that the Federal Funds rate hovers near zero as part of the Fed's stated policy, for the near to medium term, the interest rate spread component of the LII is really a story about the behavior of the 10-year Treasury interest rate. The rate on 10-year Treasuries dropped again, from 1.62 percent in June to 1.53 percent in July (monthly averages).

"It appears, therefore, that investors are still looking for safe assets, even if it means a nominal return," Slaper said. "Given the continued uncertainty surrounding the debt crisis in Europe, the global economic slowdown and the potential for hostilities between Iran and Israel, the demand for safe assets is strong."

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.