Leading Index for Indiana in December shows that things may be going 'in the right direction'
Jan. 26, 2011
BLOOMINGTON, Ind. -- The Leading Index for Indiana (LII) finished 2010 with its fourth consecutive monthly gain.
December's LII appears to show that the economic winds are finally blowing in the right direction.
After languishing in the 95-96 range for more than two years, the LII finally broke the 97 barrier in December with a value of 97.2, the highest since October 2008.
"This month's rise is largely attributed to the increase in the Dow Jones Transportation Index, as well as unfilled orders for motor vehicles and parts," said Timothy Slaper, director of economic analysis at the Indiana Business Research Center at Indiana University's Kelley School of Business.
"Other economic indicators are showing positive signs as well. The Ceridian-UCLA Pulse of Commerce Index™ (PCI), a real-time measure of the flow of goods to U.S. factories, retailers and consumers, also rose 2.4 percent in December," Slaper added. "This constitutes a year-end 'surge,' according to the authors of the PCI, given its restrained 0.4 percent rise in November."
With each month of increases, the chances that Indiana will experience a double-dip recession decrease further. While this is encouraging, forecasts project that economic growth in early 2011 will be underwhelming. The Center for Econometric Modeling and Research (CEMR) at Indiana University forecasts modest GDP growth in 2011. High unemployment will likely continue to plague the recovery in both the U.S. and Indiana.
The LII is produced each month by the Indiana Business Research Center.
Drivers of Change
Home builder confidence in the market for newly built, single-family homes remained unchanged in January, as it had in December and November. The National Association of Home Builders/Wells Fargo Housing Market Index (HMI) remains at 16. On the brighter side, the HMI regional score increased 1 point in the Midwest, after dropping 4 points last month.
While the recovery continues to ignore the housing sector, manufacturing has maintained slow but steady progress. The Purchasing Managers Index (PMI) rose to 57 from 56.6, showing that the manufacturing economy is expanding at an increasing rate. The Institute of Supply Management (ISM) also reports that exports are supporting the expansion in manufacturing.
"It is worth noting, however, that respondents to ISM's survey expressed concern over future pricing pressure due to a falling dollar and rising input prices," Slaper said.
The Dow Jones Transportation Average (DJTA) is consistent with the generally positive news, rising just over 250 points, or 5.2 percent, in December.
The auto sector had some good news as well. December auto sales were up 11.1 percent versus last year, at a seasonally adjusted annual rate of 12.6 million units. Based on January's early sales returns, CNW Research anticipates that January 2011 will better January 2010 by 16 to 18 percent.
"Also encouraging is that new floor traffic is still rising, although the increase was not at the 'staggering' rise reported last month," Slaper said. "In addition, the number of months of delay for purchase intenders who are postponing, but not cancelling, their plans to make a purchase is declining."
The reduction in the number of months for purchases to be realized may, in itself, add about 700,000 units sold in 2011, according to CNW Research. In short, sales for 2011 could top 12.5 million units.
"The LII metric for the auto sector is also telegraphing news that is more sanguine. Unfilled orders for motor vehicles and parts grew for the fourth month in a row," he noted. "Before August 2010, this measure had been signaling either a neutral or negative scenario for the auto industry."
The federal funds rate remains near zero in accordance with the Federal Reserve's continued policy of cheap money and "quantitative easing part two" (QE2). Interest rates on 10-year Treasuries have increased however, as many expect greater inflation to follow the Fed's policies. The five-month moving average of the spread -- the measure used in the LII -- increased in December, a reversal from the previous month.
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.