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Timothy Slaper
Indiana Business Research Center

Bethany Nolan
IU Communications

Last modified: Wednesday, December 21, 2011

IU's Leading Index for Indiana increased to highest level since September 2008

Dec. 21, 2011

BLOOMINGTON, Ind. -- As Hoosiers look ahead to a new year, the Leading Index for Indiana for November provides some encouraging news.

"The Grinch did not interfere with the LII's upward progress," 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. "Last month, the LII recovered all the ground lost in the first part of 2011. It also marks the first time in a year that all five components of the LII improved in a united chorus. Given these milestones, the November LII is a good reason to be optimistic about the Indiana economy going into 2012."

The index increased from its October value of 96.9 to 97.2, its highest level since September 2008.

Another measure, the Ceridian-UCLA Pulse of Commerce Index, also showed positive signs, though not quite as strong as the LII.

"The PCI increased only 0.1 percent last month. This, however, was on the heels of a 1.1 percent increase the previous month," Slaper said. "Given the PCI's weak showing in November, the index's authors caution that recent GDP and retail sales growth figures may overstate the case that the economy bounced back. Still, they remain cautiously optimistic about the future."

The chances of a double-dip recession are slim. However, economic growth through 2012 will be underwhelming. The Center for Econometric Model Research at IU forecasts modest GDP growth in 2012 -- about 3 percent. The modest economic growth will chip away at the unemployment rate very slowly. It will be unlikely the unemployment rate would fall below 8 percent by the end of next year.

Drivers of change
Confidence in the housing market rose for the third consecutive month to its highest level since the homebuyer tax credit ended in May 2010.

The National Association of Home Builders' Housing Market Index jumped from 19 in November (revised down from 20) to 21 this month. Regional indexes did not change significantly this month, with the exception of a large increase in the South.

Slaper noted that National Association of Home Builders Chairman Bob Nielsen remains cautious regarding the housing market, citing such indicators as the restrictive lending environment that is discouraging potential buyers.

The Institute for Supply Management's Purchasing Managers Index rose in November, increasing from 50.8 to 52.7, its highest value since June. Values below 50 signal a manufacturing sector in retreat.

"While it has flirted with the 50 inflection point multiple times recently, the PMI has now signaled an expanding manufacturing sector for 28 consecutive months," Slaper said. "Part of this may be due to input cost trends. Whereas a year ago many survey respondents were complaining about rising material costs, now respondents note deflationary pressures on their input costs. Respondents to the PMI survey indicate they are cautiously optimistic because of lower materials costs as well as increased order activity."

The automotive sector is showing positive signs as well. Unfilled orders for motor vehicles and parts -- the LII indicator for the auto sector -- saw another increase this month. Auto sales in November exceeded 13.5 million units on a seasonally adjusted rate, marking a 14 percent improvement over November sales last year. December's prospects are good too, according to CNW Research. Early December floor traffic was 7.8 percent higher than a year before, and CNW Research's "Jitters Index" continued on a steady decline, though authors hasten to note it is still elevated relative to a year ago.

The Dow Jones Transportation Average added a small gain in November on top of its 17 percent surge in October, rising from 4893 to 4946, an increase of just over 1 percent.

Interest rates on 10-year Treasuries dropped slightly in November, from 2.15 percent to 2.01 percent. As a result, the interest rate spread decreased, as the Fed Funds rate held near 0 percent.

"We see very little change ahead for this indicator as the Fed maintains its current policy," Slaper said.

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.