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Friday, December 17, 2010

Last modified: Friday, December 17, 2010

Leading Index for Indiana in November shows the economy made progress

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FOR IMMEDIATE RELEASE
Dec. 17, 2010

BLOOMINGTON, Ind. -- Economic expectations for the New Year brightened somewhat as the Leading Index for Indiana (LII) edged up in November and made progress for the third straight month.

The LII saw a substantial increase in October, rising from 96.4 to 96.8, and a smaller but still encouraging increase in November to a value of 96.9.

Timothy Slaper, director of economic analysis at the Indiana Business Research Center at Indiana University's Kelley School of Business, said the "marginal increase" reflects some "Grinch-like movements" in the Housing Market Index (HMI) and the Purchasing Managers Index (PMI). While still indicating an expanding economy, the PMI registered a slight decrease from October to November.

"Things are looking up for some sectors. Notably, unfilled orders of motor vehicles and parts has seen three consecutive months of increases after a nearly uninterrupted 41-month slide," Slaper said. "On a seasonally adjusted annual rate, November auto sales kept pace with October and September sales. Moreover, new floor traffic in automobile dealerships increased in the first week of December, as have same store sales."

Year to date, auto sales are up 11.1 percent over last year. CNW Research reports a comparatively strong start for December, with a "staggering increase in floor traffic" versus last year, but recent weather events may adversely affect the full month's sales. Banks and other lending institutions continue to approve more auto loans, even among sub-prime borrowers that, until recently, have been locked out of the new vehicle market the last two years.

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

Other economic indicators are showing positive signs as well. Initial reports for holiday retail sales in November provide some encouragement. The Ceridian-UCLA Pulse of Commerce Index™ (PCI), a real-time measure of the flow of goods to U.S. factories, retailers and consumers, also rose 0.4 percent in November. This increase came on the heels of three straight months of decline for the PCI.

"While positive, the change in the LII does not represent a surge that would indicate an economy on the cusp of roaring back," Slaper cautioned. "The chances of a double-dip recession are slim, but economic growth in early 2011 will be underwhelming."

IU's Center for Econometric Modeling and Research (CEMR) has forecast modest GDP growth in 2011.

"The modest economic growth will do precious little to tamp down the intractably high unemployment rate through next year," he said.

Drivers of Change

Home builder confidence in the market for newly built, single-family homes remained unchanged in December. After inching up a mere point in October, the National Association of Home Builders/Wells Fargo Housing Market Index (HMI) remains at 16.

"The ongoing weakness in the job market, the rising number of foreclosures and short-sales, and very challenging credit conditions gives builders little reason to be cheerful," said Slaper, who agrees with NAHB Chief Economist David Crowe, who noted that builders and consumers have yet to see consistent signs that the economy is improving.

"Closer to home, regional builders must be expecting coal in their stockings this Christmas," Slaper said. HMI regional score declined four points in the Midwest.

On the brighter side, the Dow Jones Transportation Average (DJTA) rose just over 100 points, or 2.1 percent, in November.

The Purchasing Managers Index (PMI) dipped slightly, but continued to show that the manufacturing sector is expanding. The Institute of Supply Management (ISM) also reports that exports are supporting the expansion in manufacturing. It is worth noting, however, that respondents to ISM's survey expressed concern over future pricing pressure due to a falling dollar and rising input prices.

As stated above, unfilled orders for motor vehicles and parts edged up for the third month in a row. "Along with the HMI that reflected poor homebuilder sentiment, this component that portends activity in the auto sector pulled the LII down over the course of the summer. The recent increases bode well for a better 2011," he said.

"The interest rate spread component is in virtual stasis and, at this point in the business cycle and as a result of Federal Reserve policy, probably does not provide much additional information about the direction of the economy in the coming months," Slaper observed.

The federal funds rate remains near zero in accordance with the Federal Reserve's continued policy of cheap money and "quantitative easing part two" (QE2). Interest rates on 10-year treasuries have increased however, as many expect greater inflation to follow the Fed's policies. The five-month moving average of the spread -- the measure used in the LII -- decreased this month, but in November, there was an uptick.

"This could be a cause for concern, as it shows that borrowing costs are rising," he said.

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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