It may be spring but IU Kelley School's Leading Index for Indiana remains in 'hibernation'
April 21, 2011
BLOOMINGTON, Ind. -- The Leading Index for Indiana (LII) edged down in March, just a micro-click from 97.3 to March's index value of 97.2. Since January's slow-in-coming, post-recession high of 97.4, the LII has been flat. It may be spring, but the index is still in hibernation.
Timothy Slaper, director of economic analysis at the Indiana Business Research Center, noted, however, that other economic indicators are showing positive signs. The Ceridian-UCLA Pulse of Commerce Index™ (PCI), a real-time measure of the flow of goods to U.S. factories, retailers and consumers, jumped 2.7 percent in March, reversing the 0.3 percent and 1.5 percent declines from January and February, respectively.
Slaper observed that despite the positive PCI signals, the index's authors also reported that the unemployment rate likely will remain stubbornly close to its current level, and could be driven down by discouraged workers leaving the labor force.
"The automotive sector is showing signs of increasing vigor," he said. "Dealership floor traffic rose 12.2 percent compared to the first week of April 2010."
Statistics from CNW Research for early April show that sales could exceed 1.1 million units -- 14 percent higher than the figure from a year ago.
"Improving credit is driving much of the sales. New-vehicle loan approvals are up across the board, with 90 percent of prime customers getting their loans approved," Slaper said. "The change in the sub-prime market is even better. Sub-prime loan approvals are up 92.6 percent over last year."
The LII is produced each month by the Indiana Business Research Center in Indiana University's Kelley School of Business.
Drivers of Change
With the exception of last month's short-lived, and unlikely, rise to 17, the National Association of Home Builders' Housing Market Index (HMI) has been stuck at 16 since November of 2010. The HMI remains well below its post-recession high of 22 in May of last year. That value coincided with the wind-down of the federal homebuyer tax credit program.
"The regional HMI results look a little better for Indiana," Slaper said. "While the national index declined this month, the Midwest regional index rose 2 points. The South drove the drop in the broader HMI index, plummeting 4 points to a value of 15."
The Institute for Supply Management's Purchasing Managers Index (PMI) stalled in March, dipping a slight 0.2 points.
"Nevertheless, manufacturing activity continues to expand, with the PMI pegged above 60 for the third consecutive month," he said. "Respondents once again expressed concern about global demand driving up the price of commodities that manufacturers use as inputs. They also worried about the effect that the earthquake in Japan would have on the U.S. supply chain."
The Dow Jones Transportation Average (DJTA) rose more than 4 percent in March, from 5,085 to 5,300, helping to give the LII some lift.
Unfilled orders for motor vehicles and parts edged up in February and the Census Bureau revised January's value upward.
"These data suggest an auto supply chain that is slowly reviving," Slaper said. "This is good news considering the patient has spent three interminable years in the ICU."
Interest rates on 10-year Treasuries dropped in March for the first time in four months. While the federal funds rate has remained near zero since the financial crisis, in accordance with the Federal Reserve's accommodative monetary policy, in March it fell to its lowest level since February 2010.
"Since the Fed funds rate has very little room to fall, the dip in the 10-year Treasury rate was substantially more, and thus the spread between the two dropped," he said. "The Fed's Quantitative Easing II (QE2) program is set to expire this summer, but some contend that the program may be extended."
Many QE2 critics have blamed high commodities prices -- from corn to copper to crude oil -- on the policy. PMI respondents complained about the Fed's easy money policies. Unwinding the QE2 program might help stem some of manufacturers' inflation fears.
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.