IU's Leading Index for Indiana unchanged from July, indicates that economy is 'slowly coasting'
European financial crisis seen as a potential threat to Indiana's economic recovery
Sept. 22, 2011
BLOOMINGTON, Ind. -- After falling three-tenths of a point in July, the Leading Index for Indiana (LII) for August in effect remained the same at 96.2.
"The LII's lack of movement supports the general economic consensus -- the Indiana economy is slowly coasting, not accelerating, but not lurching to a stop," said Timothy Slaper, director of economic analysis at the Indiana Business Research Center (IBRC) in Indiana University's Kelley School of Business, which compiles the monthly report.
The automotive sector echoes the broader economic indicators. Early returns for September floor traffic are down 1.3 percent from August, although they are still an improvement over year-ago numbers. The "Jitters Index" for September rose nearly 7 percent over last month, according to CNW Research.
Policy uncertainty is weighing heavily on consumers as reflected by both the Jitters Index and the dire August reading of the Conference Board's Index of Consumer Confidence.
"While the Michigan Thomson Reuters and the University of Michigan mid-September measure of Consumer Sentiment rose more than expected, it is still in the dismal range and the gauge for consumer outlook dropped a smidge," Slaper said.
Other economic indicators fared no better than the LII. The Ceridian-UCLA Pulse of Commerce Index™ (PCI), a real-time measure of the flow of goods to U.S. factories, retailers and consumers, fell 1.4 percent in August, adding to a 0.2 percent decline in July.
"The European financial crisis is a potential threat to Indiana's recovery," Slaper said. "Europe imported more than $8 billion of Hoosier goods last year. Spain, one of the countries in financial peril, increased its imports of Indiana goods at an average annual rate of more than 120 percent since 2000. If the European economies deflate, one would expect that their appetite for imports would fall also."
Drivers of Change
Confidence in the housing market dipped even further this month. The National Association of Home Builders' Housing Market Index (HMI) dropped from 15 to 14 in September. Regionally, only the Midwest saw a slight uptick this month. Very little has changed in the past few months in the housing market. Accessing credit for building, while competing with foreclosures, continues to be a challenge for builders.
The Institute for Supply Management's Purchasing Managers Index (PMI) dropped again in August, but less than expected. The index fell from 50.9 to 50.6, staying above the important 50 level that signals a growing manufacturing sector.
"As the PMI sits on the knife-edge between expansion and contraction, the PMI components are sending mixed signals," Slaper said. "The production gauge switched from growing to contracting in August while the inventories gauge switched from contracting to growing.
"Many purchasing managers indicated that economic uncertainty was overshadowing 'solid numbers,'" he added. "Also, some observed that inflation pressures were finally starting to subside."
Unfilled orders for motor vehicles and parts -- the indicator for the auto sector -- saw an increase in July on top of an upwardly revised number from June. The motor vehicles component of the LII, therefore, helped to offset the plunging Dow Jones Transportation Average.
The Dow Jones Transportation Average cascaded in August along with the rest of the stock market. The DJTA dropped from 5,184 to 4,667, a decline of almost 10 percent. The European debt crises have weighed heavily on investors over the past couple months.
Interest rates on 10-year Treasuries dropped precipitously in August, falling from 3 percent to 2.3 percent, almost reaching a historic low. As a result, the interest rate spread portion of the LII shrank, as the Fed Funds rate held near 0 percent. "This helped counter the downward pressure on the LII from the other components," Slaper said.
The Federal Reserve recently announced that it intends to keep the Fed Funds rate at this historically low rate for another two years in order to avoid a double-dip recession.
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.