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Timothy Slaper
Indiana Business Research Center

George Vlahakis
IU Communications

Last modified: Thursday, April 18, 2013

IU Kelley School's Leading Index for Indiana dipped slightly in April

April 18, 2013

BLOOMINGTON, Ind. -- The Leading Index for Indiana declined slightly in April, from 100.9 to 100.8, suggesting a continued mixed economic picture for the state.

Timothy Slaper, director of economic analysis at the Indiana Business Research Center in Indiana University's Kelley School of Business, said the economic index "appears to be replicating its habit of moving up leisurely for three months and then taking a break." The IBRC produces the index.

The lift provided by the Dow Jones Transportation Index -- one key component of the LII -- could not make up for the drop in the Purchasing Managers Index and the Housing Market Index. Slaper noted that the LII's activity mimics that of the National Federation of Independent Business' Index of Small Business Optimism, which ended its slow three-month climb by declining 1.3 points.

A recent uptick in consumer confidence was short-lived, as the Conference Board's Consumer Confidence Index plummeted from 68.0 to 59.7. The Thompson Reuters/University of Michigan Index of Consumer Sentiment tells a different tale with its upward revision in March, from a preliminary reading of 71.8 to a final reading of 78.6.

"Not only does this revision change the March reading from a monthly decrease to a monthly increase, it also changes the year-over-year decrease to an increase. Based on this conflicting evidence, consumers are not certain about the future of the economy," he said.

"Like the economists poring over economic data to try to determine if the payroll tax increase and the sequester are having a detrimental effect on economic growth, or whether the wealth effects of a buoyant stock market and rising home prices are helping growth, consumers probably can't get a sense of the direction or force of the economic winds."

Drivers of change

The National Association of Home Builders/Wells Fargo Housing Market Index dipped unexpectedly in April from 44 to 42.

"Investors had been expecting the HMI to rise to 45. Still, the index remains near its highest level in six years. An index value of 50 would indicate an overall positive outlook, and the index has not reached 50 since April 2006," Slaper said. "While builders are seeing increased demand for new homes as inventories of foreclosed and distressed properties shrink, they are now expressing concern that the costs of producing new homes have risen considerably. Builders cite credit restrictions and construction costs outpacing appraised values as contributing to the problem."

Closer to home, and compounding the bad housing news, the Midwest housing index plummeted in April, dropping from 49 to 41. However, interpreting this index is difficult as the regional metrics can vary quite a bit from month to month.

The Institute for Supply Management's Purchasing Managers Index dropped as well this month from 54.2 to 51.3. The PMI has been hovering around 50, the point at which purchasing managers perceive manufacturing activity to be growing, since May of last year.

March auto sales remained above the 15 million units mark and floor traffic was up 3 percent, according to CNW Research. For better or worse, subprime approvals were up 26.1 percent from last year. Unfilled orders for motor vehicle bodies, parts and trailers -- the auto sector component for the LII -- remained virtually unchanged.

The transportation and logistics component of the LII -- the Dow Jones Transportation Average -- followed the rest of the stock market on its march up last month, jumping 4.4 percent and nearly erasing the negative impact of the HMI and the PMI on the LII's movement.

"The current Fed policy of quantitative easing has undercut the interest rate spread as a good indicator of the future direction of the national economy," Slaper said. "As a result, the strength of the change in the measure does not provide a signal of the direction or strength of future economic activity in the state."

This month, minutes from Fed meetings indicated that the central bank may begin pulling back the quantitative easing program, but no specifics have been offered.

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.