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Timothy Slaper
Indiana Business Research Center

George Vlahakis
University Communications

Last modified: Friday, February 18, 2011

IU Kelley School's Leading Index for Indiana rises for the fifth consecutive month

Feb. 17, 2011

BLOOMINGTON, Ind. -- The economic recovery seems to have found its legs. Since the lazy days of summer 2010, the Leading Index for Indiana (LII) has increased for five consecutive months.

LII January 2011

The LII rose to 97.4 in January, the highest it has been since the economy rapidly unraveled in the fall of 2008. Given that the recession started in late 2007, and 2008 saw a rapid decline in the LII from over 100 to less than 96, it will still take some time for the LII to return to its pre-recession levels.

The LII is produced each month by the Indiana Business Research Center in Indiana University's Kelley School of Business.

"Other economic indicators corroborate this story. The Ceridian-UCLA Pulse of Commerce Index™ (PCI), a real-time measure of the flow of goods to U.S. factories, retailers and consumers, fell a scant 0.03 percent in January but exhibited year-over-year growth for the 14th consecutive month," said Timothy Slaper, director of economic analysis at the IBRC. "The PCI's authors caution that while the data suggests the recovery is sustained, it is not strong enough to support employment growth."

News from the auto sector is encouraging. January sales were 17 percent higher than last year, a seasonally adjusted annual rate of 12.6 million units. Based on early February returns, CNW Research anticipates that retail auto sales will hit 920,000 units in February. This is especially encouraging, CNW Research notes, because of the poor weather conditions experienced across much of the nation.

Drivers of Change

Home builder confidence in the market for newly built, single-family homes remained unchanged in February for the fourth consecutive month. The National Association of Home Builders/Wells Fargo Housing Market Index (HMI) sits at a dismal 16, and its economist lays most of the blame for the stagnant housing market on the difficulty prospective homebuyers still have acquiring financing.

On a regional basis, the HMI results were mixed. While two of four regions registered an increase in the index, the HMI for the Midwest dropped a point.

"Manufacturing is the big story this month," Slaper said. "The Institute for Supply Management's Purchasing Managers Index (PMI) rose an impressive 2.3 points in February, showing that the manufacturing industry is expanding at an increasing rate."

The PMI has not reached 60.8 since May 2004.

"At least in the manufacturing sector, the economy seems to be gaining steam. As in previous months, respondents to the survey expressed concern that global demand was driving up the price of commodities that manufacturers use as inputs," he noted.

Regular users of the PMI and the LII should be aware that the Institute for Supply Management (ISM) recently revised their (PMI) series from January 2007 to January 2011, ratcheting up last month's release from 57 to 58.5.

The Dow Jones Transportation Average (DJTA) fell a bit in January from 5106 to 5025, but this slight descent did not exert much pressure on the LII.

Unfilled orders for motor vehicles and parts continued on its upward path for the fifth month in a row. Before August 2010 this measure had been signaling neutral to negative prospects for the industry.

"The tide appears to have turned," Slaper said. "Early February floor traffic increased more than 17 percent year-over-year. Credit for auto sales is also starting to loosen up, with a nearly 61 percent increase in sub-prime loan approvals in the first few days of February compared to a year ago."

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, however, have increased for the second month in a row. The five-month moving average of the spread -- the measure used in the LII -- increased in January but did not exert much influence on the LII.

Note about Institute for Supply Management's PMI revisions:

The Institute for Supply Management recently revised its PMI from January 2007 to the present as a result of the U.S. Department of Commerce recently completing its annual adjustment to the seasonal factors used for economic data. Seasonal adjustment factors are used to allow for the effects of repetitive intra-year variations resulting primarily from normal differences in weather conditions, various institutional arrangements and differences attributable to non-movable holidays. Economists and market watchers who track the ISM indexes should be aware of these changes that took effect with the Feb. 1 release of the PMI and the Feb. 3 release of the ISM Non-Manufacturing Report On Business®.

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.