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Timothy Slaper
Indiana Business Research Center

George Vlahakis
University Communications

Last modified: Monday, November 21, 2011

IU's Leading Index for Indiana provided some encouraging news in October

Nov. 21, 2011

BLOOMINGTON, Ind. -- As Hoosiers look ahead to the holiday season, the Leading Index for Indiana provided some encouraging news in October.

November Leading Index

"The LII appears to be recovering lost ground this fall, as we predicted last month," 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. "The results from October did not disappoint. Having stalled and then gently descending since the beginning of this year, the LII regained almost all the ground it lost since January."

The index increased half a point from its September value of 96.4 and now stands at 96.9, just shy of its post-financial-crisis high.

"While we remain cautious, this latest movement in the LII can only be viewed as a positive sign, with four of the LII's five components rising in October," Slaper said.

Another measure, the Ceridian-UCLA Pulse of Commerce Index, rose 1.1 percent following three consecutive months of declines.

"The PCI, a real-time measure of the flow of goods to U.S. factories, retailers and consumers, had declined far more severely than the LII over the preceding months, but its authors seem optimistic over October's result," Slaper said. "Still, they remain cautious as well, predicting that unless the PCI continues on a positive trajectory for several consecutive months, we are still stuck in a 'she-loves-me, she-loves-me-not economy.'

"Or, to think about it another way, we are also stuck in a Groundhog Day economy -- as in the movie," he added. "Next year's economic forecasts are remarkably and disturbingly similar to 2011. "The slight increases in the LII mirror last year's movement. The change in the LII does not represent a surge that would indicate an economy on the cusp of roaring back."

The chances of a double-dip recession, however, are slim. Economic growth through 2012 will be underwhelming. The Center for Econometric Model Research at IU forecasts modest GDP growth in 2012 -- between 2.5 and 3 percent. The modest economic growth will chip away at the unemployment rate very slowly. It will be unlikely that 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 second consecutive month to its highest level since the homebuyer tax credit ended in the spring of 2010. The National Association of Home Builders' Housing Market Index jumped from 17 in October (revised down from 18) to 20 this month. Regionally, the Northeast, the South and the Midwest all registered substantial gains. The West declined from an unusually high October number.

Tim Slaper

Timothy Slaper

Print-Quality Photo

Slaper noted that National Association of Home Builders Chairman Bob Nielsen has cautioned users of the index not to get too excited because many home builders continue to face challenges with regard to the high number of foreclosures, the difficulties of obtaining construction financing and accurate appraisals, and the restrictive lending environment that is discouraging potential buyers.

The Institute for Supply Management's Purchasing Managers Index was the only LII component to decline in October, falling slightly from 51.6 to 50.8. 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 27 consecutive months," Slaper said. "Part of this may be due to input costs. Whereas a year ago many survey respondents were complaining about rising materials costs, now some are noticing deflationary pressures driving down the costs of their inputs."

Unfilled orders for motor vehicles and parts -- the indicator for the auto sector -- saw another increase in September and passed the 14,000 level for the first time since October 2009. At 14,005, this indicator is continuing on a reversal of a very long downward trend. October auto sales remained firm. October's auto sales were more than 7 percent higher from the same month last year, registering an adjusted annual rate of 13.2 million units. Many industry analysts are predicting well over 13 million unit sales in 2012.

The Dow Jones Transportation Average surged in October, mirroring the general rally in the stock market. It rose from 4,189 to 4,893, an increase of almost 17 percent. The index still has a long way to go to regain its post-recession high of 5,515 from April of this year.

Interest rates on 10-year Treasuries rose a bit in October, from 1.98 percent to 2.15 percent, coming off a more than 50-year low. As a result, the interest rate spread increased, as the Fed Funds rate held near 0 percent.

"Normally this would put downward pressure on the LII, but the interest rate spread component is a moving average, and the moving average continued in a positive direction for the LII this month," Slaper said. "We see very little change ahead for this indicator as the Fed maintains its current policy."

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.