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Thursday, August 19, 2010

Last modified: Thursday, August 19, 2010

Leading Index for Indiana turned around in July

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FOR IMMEDIATE RELEASE
Aug. 19, 2010

BLOOMINGTON, Ind. -- After two months of decline, the Leading Index for Indiana (LII) squeaked out a slight increase in July.

"June saw a steep fall in the LII. With four of the five components posting declines in June, there was concern that a poor performance in July would signal a warning sign of a looming recession," said Timothy Slaper, director of economic analysis at the Indiana Business Research Center at Indiana University's Kelley School of Business. "With the LII's July increase from 96.2 to 96.4, the warning sign has ended -- at least for now."

There is little cause for celebration, however, as two components of the index -- the Housing Market Index and the Purchasing Manager Index -- did retreat in July, Slaper added.

The main driver behind the LII's rise this month was the Dow Jones Transportation Average (DJTA), which rose more than 10 percent between the end of June and the end of July. Even with the broad retreat of the stock market in early August and the recent swoon of the Dow, the LII would still have eked out an increase.

Also helping to alleviate fears of a double-dip recession, the Ceridian-UCLA Pulse of Commerce Index™ (PCI) increased in July by 1.7 percent, after dropping 1.9 percent in June. The PCI's authors interpret the improvement as a sign that the economy continues to recover, albeit slowly.

"The LII's rise after two months of decline improves the outlook for Indiana's economy to some extent, but the LII remains below its April 2010 post-recession high, a reminder of the precarious economic recovery," Slaper said.

The LII is produced each month by the Indiana Business Research Center.

Drivers of Change

Home builders' confidence continued to decline in August from 14 to 13, its lowest level since March 2009, according to the National Association of Home Builders/Wells Fargo Housing Market Index (HMI).

"The HMI's recent values are troubling, because values below 50 signal that more home builders consider the market 'poor' than consider it 'good,'" Slaper observed. "The HMI has not reached 50 since April 2006. The regional HMI news was a bit better this month, at least from Indiana's perspective. Most of the HMI decline registered in the Northeast. The Midwest has held steady."

As previously mentioned, the primary force behind the LII's rise in July was the Dow Jones Transportation Average (DJTA).

According to the Purchasing Managers Index (PMI), manufacturing activity continues to expand, but that expansion continues to slow. The PMI this month fell to 55.5 from 56.2 last month. Like the LII, the PMI is well off its post-recession high of 60.4 in April of this year. A value above 50 signals expanding manufacturing activity.

"In contrast to the HMI and PMI, the interest rate spread did not contribute negative pressure on the LII. The federal funds rate held constant near zero in accordance with the Federal Reserve's stated policy," he said. "The 10-year Treasury rate declined again in July to just above 3 percent. This drove the spread down, which some speculate will spur banks to seek higher returns by expanding lending."

The auto sector component of the index continues to limp along. After encouraging signs in May, June's auto sales disappointed. July's sales recovered somewhat to a seasonally adjusted volume of 11.4 million units. There are signs, however, that sales this fall may also disappoint.

According to CNW Research (CNWMR.com), dealer floor traffic for new cars in early July was off 4.5 percent from last year. As floor traffic typically generates sales in about three months, the slowdown on showroom floors in July will result in unrealized sales in October or November if established patterns continue.

The LII component for the auto sector tells a similar story: unfilled orders for motor vehicles and parts have not picked up.

About the Leading Index for Indiana
The LII, developed by the Indiana Business Research Center (www.ibrc.indiana.edu/), 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.


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