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Timothy Slaper
Indiana Business Research Center

George Vlahakis
IU Communications

Last modified: Tuesday, May 21, 2013

IU Kelley School's Leading Index for Indiana declines for second month in a row

May 21, 2013

BLOOMINGTON, Ind. -- The Leading Index for Indiana continued to lose ground in May, following a slight slide in April, from a revised value of 100.9 to 100.8.

"The economic data has presented a mixed picture recently, and the components of the LII were no exception," said Timothy Slaper, director of economic analysis at the Indiana Business Research Center in Indiana University's Kelley School of Business.

"Despite the stock market going on a tear, the Dow Jones Transportation Index dipped a bit. There was also a marginal dip in the Purchasing Managers Index (PMI). Those factors outweighed the rise in the Housing Market Index and the auto component of the LII," Slaper explained.

The IBRC produces the monthly index.

The Index of Small Business Optimism rose 2.6 points to 92.1, just above the recovery average of 90.7.

"Yet pessimism abounds within the sector, as still far more of those surveyed expect business conditions to be worse in six months than those who think they will be better. Economic performance is contradictory -- corporate profits are at record levels and the stock market has hit new highs, yet the small business half of the economy is expanding slowly, by a rate driven by population growth rather than economic dynamism," Slaper said.

The Thompson Reuters/University of Michigan Index of Consumer Sentiment rose last month, to 83.7 from 76.4, the highest it has been since July 2007. The Conference Board's measure of the economic outlook for the next three to six months also climbed 0.6 percent in April, more than forecast.

"These are good signs and show that consumers are overcoming the effects of higher taxes and a package of federal spending cuts -- 'the sequester' -- that could affect job creation," he said

The headline number for total GDP growth came in at 2.5 percent. It shows a domestic private sector that is doing reasonably well. The U.S. economy seems to have settled into a sustainable slow growth trajectory. If consumption grows at a 2.5 percent rate, investment at 5 percent (both business and residential), and government at just a little above zero, this will produce the so-so output growth of 2.5 percent. If housing construction regains its footing, however, the economy would grow at a rate above so-so.

Drivers of change

The National Association of Home Builders/Wells Fargo Housing Market Index regained its ascent, moving up 3 points from a revised April value of 41. The Midwest housing index, after plummeting in April, dropping 9 points, made up some of its lost ground, moving up 5 points.

"The construction industry supply chains will take time to get re-established after recession-related cutbacks, but builders' views of sales conditions are more optimistic," Slaper said. "They also expect that consumer sentiment will continue to solidify and -- lured by affordable mortgage rates -- customers will head back to the market in force."

The Institute for Supply Management's Purchasing Managers Index sputtered, falling 0.6 points to 50.7. The PMI continues to hang around 50, the point at which purchasing managers perceive manufacturing activity to be growing, since May of last year.

April auto sales, while up 8.4 percent from a year ago, were 14.9 million units, which is the lowest recorded monthly level for this year. Unfilled orders for motor vehicle bodies, parts and trailers, the auto sector component for the LII, increased almost imperceptibly.

The transportation and logistics component of the LII -- the Dow Jones Transportation Average -- defied the Dow's climb in April and fell by 1.2 percent.

"Given that inflation is virtually non-existent, given the expected headwinds of the sequester and the overall slow economic growth, there is slim chance that the Fed policy of quantitative easing will get unwound anytime soon," Slaper said. "The Fed's policy has undercut the interest rate spread as a good indicator of the future direction of the national economy. As a result, the strength of the change in the measure does not provide a signal of the direction or strength of future economic activity in the state."

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.