IU Kelley School's Leading Index for Indiana took a breather in June, remains unchanged
June 21, 2012
BLOOMINGTON, Ind. -- After nine months of steadily, if unassertively, climbing, the Leading Index for Indiana took a breather in June, remaining unchanged at a revised May value of 99.5.
"The lack of momentum this month is the product of countervailing forces," 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. "The good news from the housing market was offset by drops in the transportation stock index and the purchasing managers' index. Overall movement in each of the LII components was somewhat tempered this month."
The Ceridian-UCLA Pulse of Commerce Index was less ambiguous in May, rising 0.8 percent. The PCI has now risen for three consecutive months. The index, which previously had exhibited a year-over-year decline, now stands about even with its May 2011 reading.
Despite the PCI good news, the downbeat picture from the labor market has resulted in an increasingly gloomy economic outlook. An index of consumer sentiment did not fare well this month. The Thomson Reuters/University of Michigan number declined significantly from its final May reading. The preliminary June value was 74.1, its lowest level since December.
"Some believe this drop is a reaction to the gyrations in the financial markets and worries about the European debt crisis," Slaper said. "The troubles across the pond could have a significant effect on Indiana's economy. The European economies import 25 percent of Indiana's exports."
Spain's average annual rate of import growth from Indiana over the past decade was more than 20 percent until last year. In 2011, Spain increased its imports from Indiana by a meager 1.7 percent. That beats France, however. After increasing its purchases from Indiana by more than 6 percent a year for the past decade, Indiana's exports to France dropped by more than 12 percent in 2011.
"The overall down-spirited outlook of the labor market, consumer sentiment and export performance is unfortunately confirmed by a growing list of other indicators," Slapper added. "New orders for manufactured goods were down in April for the third time in four months. The same holds for non-defense, non-aircraft orders for capital goods -- a proxy for business investment."
Drivers of change
Housing market confidence continued to be a ray of sunshine for the economy this month. The National Association of Home Builders' Housing Market Index increased from a revised May number of 28 to 29 in June, its highest level since May 2007. The HMI has now remained above 20 for seven consecutive months, something it has not done since the bursting of the housing bubble.
"While the latest HMI movement was not enough to push the LII higher, this trend is a very positive sign for a future recovery in housing," Slaper said.
The Institute for Supply Management's Purchasing Managers Index dropped from last month's level of 54.8 to 53.5 in June. "While the index shows that the manufacturing sector is still expanding, it is doing so with less vigor," he said.
Auto sales in May showed a healthy increase above year-ago levels; but given the upswing earlier this year, they fell short of expectations. Car sales were up 25.6 percent over May 2011 sales but registered an annual sales rate below 14 million units for the first time this year (seasonally adjusted). Unfilled orders for motor vehicle bodies, parts and trailers rose in April to their highest level since October 2008. Unfilled orders have been steadily increasing since January 2010, a fair proxy for movement in the overall economy.
The transportation and logistics component of the index -- the Dow Jones Transportation Average -- put downward pressure on the LII again in May. The average dropped from 5,230 in April to 5,075 in May, following a slight drop in April. "The stock market has been under substantial pressure lately due to anemic job growth and worries over Europe," Slaper said.
The interest rate on 10-year Treasuries dropped to 1.8 percent in May, its lowest level in at least 60 years. The Fed Funds rate remained near zero as part of the Fed's stated policy, so the interest rate spread dropped a bit more. Rumors have circulated lately that the Fed may embark on another program of quantitative easing this summer if it views a threat to the fledgling recovery.
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.