IU's Leading Index for Indiana declined in July; economy expected to struggle in the coming months
Aug. 18, 2011
BLOOMINGTON, Ind. -- The Leading Index for Indiana (LII) stumbled in July. After eking out a small gain in June, the LII continued its downward trajectory since the beginning of the year.
The LII fell three-tenths of a point in July, from 96.5 to 96.2. The LII's latest movement is further evidence that the economy is expected to struggle in the coming months, 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.
Other economic indicators also dipped in July. 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 0.2 percent in July, offsetting some of the 1 percent rise in May. In addition, the Thomson Reuters/University of Michigan Index of Consumer Sentiment plummeted by more than 10 percent in July amid the tumult over the federal debt ceiling.
"The automotive sector does not have much gas in the tank either," Slaper said. "Early returns for August floor traffic are off slightly from July and manufacturer incentives are up -- a sign of sputtering demand."
The "Jitters Index" for August "posted a massive increase," according to CNW Research. In short, car sales are going to be wobbly, at an annualized rate in the 11.5 range.
Not only are the coming months expected to show weak economic growth, the recovery of the last couple years was not as strong as originally thought, Slaper said. The Bureau of Economic Analysis recently revised the past four years' national gross domestic product (GDP) figures. The revision was not favorable.
"The data now show the economy diving deeper at the nadir of the recession than previously reported," he observed. "The data also shows that the economy did not recover as quickly. According to the revised figures, U.S. GDP has yet to regain its post-recession peak of four years ago. This meager economic growth helps explain why the employment rebound has been so fragile."
Drivers of Change
Confidence in the housing market continues to explore the bottom. The National Association of Home Builders' Housing Market Index (HMI) dropped from 16 to 13 in June but now sits at 15. Regionally, things look worse. While the Northeast and West saw an uptick in builder confidence, the Midwest index fell.
"Based on other measures of consumer confidence -- the Jitters Index and the Index of Consumer Sentiment -- home builders must be echoing what they hear from prospective buyers," Slaper said. "While buying conditions couldn't be more favorable in terms of interest rates, prices and selection, the uncertain economic climate and concerns about job security are keeping people out of the market."
The Institute for Supply Management's Purchasing Managers Index (PMI) experienced another substantial decline this month, wiping out the increase from June. The index fell from 55.3 to 50.9.
"This is a troubling sign, because values above 50 indicate a growing manufacturing sector, whereas values below 50 indicate a contracting manufacturing sector," Slaper explained. "Of note, inventories switched from growing to contracting, as did new orders. Many respondents to the survey indicated that while domestic sales had become sluggish, exports remained strong. Also, some observed that inflation pressures were finally starting to subside."
Unfilled orders for motor vehicles and parts -- the indicator for the auto sector -- rose slightly in June. The Census Bureau also revised May's figure up, indicating some mild positive movement in the motor vehicles component of the LII.
July's auto sales firmed up as the month came to a close, registering a marginal increase over July 2010. August sales -- at a seasonally adjusted annual rate -- will be lucky to beat July's 12.2 million units given the softness in consumer confidence and the fall in early August floor traffic.
The Dow Jones Transportation Average (DJTA) took a tumble in July along with the rest of the stock market. The DJTA dropped from 5,424 to 5,184; a decline of 4.4 percent. Investors have been jittery lately as a result of uncertainty over the budget deficit and European debt crises.
Interest rates on 10-year Treasuries remained constant at 3 percent in July. As a result, the interest rate spread portion of the LII remained relatively constant, as the Fed Funds rate held near 0. The Federal Reserve recently announced that it intends to keep the Fed Funds rate at this historically low 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.