IBRC's Leading Index for Indiana will enable Hoosiers to better understand state market conditions
Oct. 7, 2009
BLOOMINGTON, Ind. -- The Indiana Business Research Center at Indiana University's Kelley School of Business today (Oct. 7) announced the creation of a new economic index that will enable Hoosiers to better understand market conditions in the state.
The IBRC's new Leading Index for Indiana (LII) reflects the unique structure of the Indiana economy, in contrast to The Conference Board's Leading Economic Index and other indexes that are national in scope. It was announced this week in the center's publication,
In developing the LII, center researchers created a composite index of current economic activity in Indiana and identified economic indicators that predict changes in several key economic sectors in Indiana. Timothy F. Slaper, director of economic analysis at the IBRC and director of the index project, said it could prove useful in providing warning signs of upcoming recessions.
"The leading index reveals a steady decline well before both of the recessions since 1997 (the first year all the needed data became available)," Slaper said. "Warning signs of an impending recession -- when at least three out of the five indicators turn negative -- occurred six months before both the 2001 and the current recessions.
"These warning signs can provide state government officials an indicator of coming economic storms and the additional burdens they will impose upon the state's economic and relief programs, " he added.
The IBRC will release the LII monthly. Below is its initial report using August data. On Oct. 30, the IBRC will release the index using September data.
A complete explanation of the Leading Indiana Index and its development can be found online at http://www.ibrc.indiana.edu/ibr/, along with articles about Indiana per-capita income and the "green economy" in the state.
Alex W. Cohen and Ryan A. Krause, research assistants at the IBRC, also contributed to the index project.
Index in August
Slaper said the Leading Index for Indiana was unchanged from July.
Three of the five components that make up the index moved up in August, but the dip in the auto sector resulted in no movement in the composite index. The decline in the auto sector component of the LII comports with the Chicago Fed Midwest Manufacturing Index (CFMMI) auto sector component. The CFMMI decreased 0.3 percent in August, with Midwest regional auto production dropping 4.2 percent.
"The flat LII in August and the recent Bureau of Labor Statistics announcement of greater than expected job losses in the month of September should make one pause before popping open Champagne to celebrate the end of the recession," Slaper said.
Drivers of Change
The positive movement of the Housing Market Index (HMI) is good news. While the index is still well below 50 -- the mark where the number of positive sentiment responses is equal to the number of responses noting negative sentiment -- the index moved up a couple points from July to August. Regionally, the Midwest also registered upticks in August.
"The HMI will be important to watch in the coming months as the window of time has closed for builders to start a new home in time for the buyer to take advantage of the tax credit that expires at the end of November," Slaper said. "The recovery in home construction is fragile and there are concerns among builders that the momentum gained from the tax credit will wither."
The Purchasing Manager Index (PMI) produced by the Institute of Supply Management moved into positive territory in August. Similar to the HMI, readings above 50 indicate that the economy is expanding. After hitting its nadir in January of 2009, the PMI has made steady progress upward.
The low for the Dow Jones Transportation Average (DJTA) occurred in early March 2009. Since, the DJTA has moved upward somewhat erratically. There was a positive movement from July to August for these 20 transportation stocks.
"The behavior of the interest rate spread has been somewhat vexing. The aggressive Federal Reserve policy to maintain an extremely low federal funds rate may temporarily obscure the direction this indicator is pointing," he said.
As mentioned above, the auto sector component of the index registered a decrease in August. Unfilled orders for motor vehicles and parts fell 0.7 percent in August, after falling 4.0 percent in July. The August 2009 value was 18.9 percent lower than the 2008 value for the same month.