Leading Index for Indiana continued to post gains in April
May 19, 2010
BLOOMINGTON, Ind. -- The Leading Index for Indiana (LII) continued to gain ground in April.
After a positive report in March, the LII continued its upward swing in April, slowly rebuilding from the declines that began in June 2007.
Tanya Hall, an economic research analyst at the Indiana Business Research Center at Indiana University's Kelley School of Business, said the index's movement reflects the generally good economic news recently. The direction and strength of the LII's movement in April remains consistent with the slow recovery that is expected over the next few months.
"Most economic indicators have pointed in the positive direction recently," Hall said. "The Consumer Confidence Index gained additional ground in April from its March rebound, reaching its highest reading in a year and a half (since September 2008)."
Consumer personal consumption expenditures increased in March, with the majority of durable goods consumption in motor vehicles and parts.
"Consumers are indicating a brighter outlook about the economy in the next six months and their concerns about current business and labor market conditions continue to ease," she said. "Consumers are also more optimistic about the job outlook. It is job growth that will likely be the key to sustaining this positive consumer momentum."
Drivers of Change
According to the NAHB/Wells Fargo Housing Market Index (HMI), home builders' confidence in the market continues to rise after witnessing increasing consumer interest in new single-family homes. The index surged three points -- from 19 to 22 -- to its highest level since August 2007.
This surge is due to consumers taking advantage of home buyer tax credits that expired at the end of April and the rising sales expectations for the next six months despite the lack of incentives. Regionally, the Midwest and South gained two points, whereas the Northeast and West respectively gained 14 and seven points in the index.
The Dow Jones Transportation Average (DJTA) also moved higher in April, adding another 6.6 percent to the 5.6 percent DJTA gain in March.
According to the Purchasing Manager Index (PMI), manufacturing also continued its upward momentum. The Institute of Supply Management reports that, after losing about two points in February, the April PMI maintained the March PMI climb with a growth of nearly one point.
"This continued PMI growth indicates that the manufacturing economy is generally expanding, albeit slowly, with the rest of the economy," Hall said. "The Inventories Index retreated nearly six percentage points from its March growth, which in part may be the result of strong auto sales in March depleting inventory or lingering uncertainty amongst manufacturers about future economic activity. In April, auto sales had an eight percent decline due to incentive pullbacks by dealerships; thus, we expect to see the inventories to return to higher levels in the upcoming months."
The Federal Reserve continues its policy of keeping the federal funds rate at close to zero. "This is hoped to spur borrowing amongst households, businesses and financial institutions by lowering the cost of borrowing," Hall added. "It is expected that the federal funds rate will increase shorter-term rates later this year."
The Treasury bill rate was up slightly in May, continuing the historically high interest rate spread. "Unfortunately, this large spread may discourage banks from lending as risk-free profits can be made by buying Treasury securities rather than lending to unattractive loans," Hall said.
"Nevertheless, some economy watchers argue that the current large spread is an indication that the recovery will be stronger than the "U" shape recovery that dominates most economic forecasts, especially since it is occurring this soon following the recession."
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.