IU's Leading Index points to economic recovery in Indiana
Jan. 23, 2012
BLOOMINGTON, Ind. -- The Leading Indicators for Indiana pointed to a recovery that is finally gaining traction, hitting a new post-crisis high in December. The LII jumped from 97.1 to 97.5 -- its highest level since September 2008.
December was also the second month in a row in which all five components of the LII contributed positively to the index.
"While there is still considerable economic uncertainty, and the recovery is still fragile, there is reason for optimism that Indiana will see modest economic growth in 2012," said Timothy Slaper, director of economic analysis at the Indiana Business Research Center in Indiana University's Kelley School of Business, which compiles the monthly report.
Slaper noted that another measure, the Ceridian-UCLA Pulse of Commerce Index, also continued to inch forward positively. The PCI increased 0.2 percent in December, adding to its 0.1 percent increase in November. While the upward movement in the PCI is gradual, it is positive. The index's authors, however, hasten to note that the PCI remains below its 2011 highs.
"While far from frisky, the auto sector is becoming more energetic," Slaper said, noting that December auto sales were 13.5 million units at a seasonally adjusted annual rate and that 2011 sales posted a 10.2 percent gain over the previous year.
New vehicle floor traffic in early January showed a 12 percent improvement over January sales last year, according to CNW Research, who's "Jitters Index" declined for the fourth consecutive month. Sub-prime auto loan approvals were up substantially from January 2011, signaling that credit is continuing to ease.
Drivers of change
Confidence in the housing market rose for the fourth consecutive month in January, finally surpassing its level from May 2010 when the home-buyer tax credit ended. The National Association of Home Builders' Housing Market Index jumped 4 points this month, from 21 to 25, its highest value since June 2007.
"This is a positive sign that the housing market may foresee better news in the coming year," Slaper said, adding that all four regional indexes also moved up in January.
The Institute for Supply Management's Purchasing Managers Index rose again in December, increasing from 52.7 to 53.9, its highest value since June 2011.
"This is the PMI's second consecutive monthly increase and telegraphs that the manufacturing sector has grown steadily, if slowly, for 28 consecutive months," Slaper said.
Unfilled orders for motor vehicles and parts -- the LII indicator for the auto sector -- increased in November. On the other hand, the October number was revised downward significantly, so that unfilled orders remain below September's post-recession high.
The Dow Jones Transportation Average notched another consecutive, if small, gain in December, rising from 4,946 to 5,020. The index is still well below April's post-recession high of 5,515.
Interest rates on 10-year Treasuries edged lower in December, decreasing from 2.01 percent to 1.98 percent. As a result, the interest rate spread decreased, as the Fed Funds rate held near 0 percent.
"This minor change still put some upward pressure on the LII," Slaper said. "There is little reason to think that this indicator will change significantly in the coming months. Given excess production capacity, generally low inflationary pressures and delicate state of the recovery, the Fed is expected to maintain its current monetary policy."
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.