Leading Index for Indiana continued its retreat into June
July 22, 2010
BLOOMINGTON, Ind. -- After falling in May, the Leading Index for Indiana (LII) continued its retreat in June.
"Not only was the drop in June more rapid than in May, three of the five components of the LII lost ground, namely, home builders' sentiment, the Dow Jones Transportation Average and the Purchasing Managers Index (PMI). A fall in three or more components of the LII for several consecutive months constitutes a warning sign that a recession is likely," said Timothy Slaper, director of economic analysis at the Indiana Business Research Center at Indiana University's Kelley School of Business.
"That said, and on a more positive note, there may be more to the numbers than meet the eye," Slaper added. "While the PMI did fall, the index still indicates that the economy is expanding, albeit at a slower pace."
The authors of the Ceridian-UCLA Pulse of Commerce Index™ (PCI) note that, while the PCI also dropped in June, the fall does not necessarily show that the economy is heading into a double dip recession. Much of the PCI fall is due to the calendar -- when Memorial Day falls -- rather than a distinct negative trend.
The LII's fall in May and June, together with the fact that Consumer Sentiment declined to the same level it was a year ago, support the outlook that the economic recovery will continue to be slow.
The LII is produced each month by the Indiana Business Research Center.
Drivers of Change
Home builders' confidence continued to decline in July to its lowest level since June of last year, according to the National Association of Home Builders/Wells Fargo Housing Market Index (HMI).
"The sustained slide in builders' outlook for the future is largely due to the expiration of the federal home buyer tax credit program," Slaper said. "There is concern that many of the sales that would have occurred this summer were likely pulled forward to meet that program's deadline. Regionally, however, the HMI results were mixed: the Midwest posted an ever-so-slight improvement in builder sentiment."
Following the overall stock market, the Dow Jones Transportation Average (DJTA) dropped in June. May and June's DJTA tumble erased all the gains made earlier this year.
According to the Purchasing Managers Index (PMI), manufacturing activity continues to expand, but less vigorously than in the first five months of the year. The Institute of Supply Management (ISM) Employment Index also indicates an expansion, but at a slightly slower clip than in May.
"The interest rate spread did not contribute to the negative turn on the LII," Slaper explained. "The federal funds rate is still close to zero in accordance with the Federal Reserve's attempt to thaw the financial sector. The 10-year Treasury rate declined a fraction in June to its lowest level since May of last year.
"Significant interest rate spreads occurred as the economy recovered from the recessions in 1992 and 2003 and, as a result, some economy watchers have argued that the large spread is a sign of a nascent rebound," he added. "Given the recent movements in the LII, home construction that is in the doldrums, and gloomy consumer sentiment, there is little chance that the rebound will be anything but anemic."
The auto sector component of the index continues to show a lethargic recovery. Floor traffic at dealerships in May reached its highest point since the end of the Cash for Clunkers program, but sales in June were 10.9% lower than in May. On a seasonally adjusted annual basis, sales fell to 11.1 million units in June from 11.8 million units in May.
About the Leading Index for Indiana
The LII, developed by the Indiana Business Research Center (www.ibrc.indiana.edu/), 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.