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Timothy Slaper
Indiana Business Research Center

George Vlahakis
IU Communications

Last modified: Tuesday, August 20, 2013

IU Kelley School's Leading Index for Indiana shows signs that economy finally is gaining traction

Aug. 20, 2013

BLOOMINGTON, Ind. -- After slumping this spring, the Leading Index for Indiana showed that the state's economy may be gaining traction, moving up 0.6 points to 101.6 in August.

All the LII's components are pointing up, some strongly. Home builders are more optimistic. Purchasing executives are noting an expansion in the manufacturing sector. Unfilled orders in the auto sector are trending up.

"One often opines in the LII report that the monthly data have been mixed. That is still true, but the balance appears to be slightly more positive," said Timothy Slaper, director of economic analysis at the Indiana Business Research Center in Indiana University's Kelley School of Business. The IBRC produces the monthly index.

"Advance data on second quarter for total real output -- GDP -- in the U.S. came in at 1.7 percent. Not spectacular, not even average, but it beat first-quarter growth," Slaper added. "Household real income rose slightly in June. The recent rate of increase is enough to keep consumption growing, but without much gusto.

"One indicator of consumer sentiment fell slightly in July, but auto sales remained strong. Housing starts and permits both fell in June -- something of a head-scratcher given the alleged recovery in the housing market -- while industrial production rose. In July, however, housing starts and permits edged up, while industrial production was unchanged."

The Thomson Reuters/University of Michigan Index of Consumer Sentiment rose to 85.1 in July, the highest it has been since the summer of 2007.

In contrast, the Conference Board Consumer Confidence Index, which had improved in June, pulled back slightly in July, precipitated by a weakening in consumers' economic and job expectations. The Index now stands at 80.3 (1985=100), down from 82.1 in June. The Expectations Index decreased to 84.7 from 91.1 last month. Consumers' outlook for the labor market was less upbeat. Those anticipating more jobs in the months ahead declined to 16.5 percent from 19.7 percent, while those anticipating fewer jobs increased to 18.1 percent from 16.1 percent.

The NFIB Index of Small Business Optimism gained a meager 0.6 points in July. At 94.1, the Index telegraphs nothing but a subpar performance for the third quarter.

Tim Slaper

Timothy Slaper

Print-Quality Photo

"The media spin -- making lemonade if you will -- may make mention that the July reading is the fourth highest reading since December 2007. Big deal. It is still well below the average reading of 100 in the prior 35 years and is still half a point below the December 2007 reading," Slaper said. "Those who watch the index are suggesting that it be renamed the 'Small Business Pessimism Index.'"

Slaper noted that NFIB chief economist Bill Dunkelberg has questioned why nothing has been done to "allay the most pressing concerns identified by small business job creators" such as rising health insurance costs, regulations, tax complexity, energy costs and general economic uncertainty.

Summing up Dunkelberg's comments, Slaper said, "We aren't sinking, but this treading water for five years is getting exhausting."

Drivers of change

The business news has been fixated on the recovery in the housing sector, and it appears that home builders have shaken off their blues. The National Association of Home Builders/Wells Fargo Housing Market Index rose another 3 points to 59. Four consecutive monthly gains bring the index to its highest level in nearly eight years.

Regionally, the gains were uneven: the Midwest and West each posted six-point increases in their 3-month moving average, to 60 and 57, respectively, but the Northeast was unchanged.

"Firming home prices and thinning inventories of homes for sale are contributing to an increased sense of urgency among those who are in the market. As a result, builders are seeing buyers who are more earnest," Slaper said.

The Institute for Supply Management's Purchasing Managers Index jumped 4.5 points to 55.4. Moreover, the New Orders Index, the Production Index and the Employment Index all registered strong gains. Comments from the panel of purchasing executives generally indicated stable demand and slowly improving business conditions.

The U.S. automobile industry continues its roll, albeit on the slightly more reserved pace, selling 1.3 million light vehicles in July. The July seasonally adjusted annual rate for light vehicle sales was 15.6 million units, lower than June's 15.9. CNW Research notes, however, that floor traffic and pent up demand are still clicking upward, which bodes well for future sales. The auto sector component of the LII, unfilled orders for auto bodies and parts, also rose about 1.1 percent.

The Dow Jones Transportation Average rose a healthy 4.6 percent, moving into unchartered territory, closing at an average of over 6,500 as July transitioned to August. The index has never been higher.

The yield on 10-year U.S. Treasuries continued its march upward.

"The news surrounding interest rates is when 'the Bearded One (Fed Chief Ben Bernanke)' will bring quantitative easing to an end -- a more robust economy means an end to QE -- and who will replace him. As I've stated before, the Fed's policy undercuts the usefulness of the interest rate spread as an indicator of the future direction of the economy," Slaper said.

About the Leading Index for Indiana

The LII was developed for Hoosier businesses and governments to provide a signal for changes in the general direction of the Indiana economy. In contrast to The Conference Board's Leading Economic Index and other indexes that are national in scope, the LII uses national level data for key sectors that are important to the Indiana economy. The reason the LII uses national level data is because national data are timelier than state-level data.