IU Kelley School of Business' Leading Index starts to regain lost ground

  • July 21, 2014

FOR IMMEDIATE RELEASE

BLOOMINGTON, Ind. -- The Indiana University Kelley School of Business' Leading Index for Indiana rose in July for the second consecutive month, suggesting that the state's economy is headed in the right direction.

"The Leading Index for Indiana, after slipping on last winter’s ice earlier this year, has begun a somewhat convincing recovery," said Timothy Slaper, research director of the Indiana Business Research Center in the Kelley School, which produces the monthly index.

The index rose to 101.2 from a revised June reading of 101.1. Thanks to the greater than expected increase in home builder sentiment and the exuberant stock market, the index rose despite the small dip in the manufacturing index.

"There has been continuing encouraging economic news on the employment front, and this may help to explain the boost in the home builders’ optimism that surpassed expectations of many analysts and market watchers," Slaper said. "As people feel more certain about their job prospects -- either getting a better one or keeping the one they have -- they are more comfortable with making large financial commitments like buying a house."

Slaper noted that homebuilders’ sentiment is a forward-looking measure. Looking at home construction data presents a different picture. Building permits for privately owned housing units in June were 4.2 percent below May’s revised rate. Housing starts in June were 9.3 percent below the May revised rate. Many economists projected that permits and starts would climb by around 2 percent.

Auto sales are a continuing bright spot. There were 1.4 million light-vehicle sales in June 2014. While only up 1.1 percent from June 2013, the year-to-date auto sales totaled 8.1 million, up 4.2 percent from a year ago. The seasonally adjusted annual rate in June was 16.9 million units.

The last time the seasonally adjusted annual rate for a month reached 16.9 million was August 2005. That said, incentive levels by both manufacturers and dealers totaled nearly $4,000 per unit or 8.7 percent of average MSRP, according to CNW Research.

"One might say that the economy is stuck in a non-recession, which is not to be confused with a recovery," Slaper said, pointing out that the June reading for the Thomson Reuters/University of Michigan Consumer Sentiment for June came in at 82.5, slightly above May’s final read of 81.9.

"Relative to its 40-year track record, the consumer sentiment index is still materially below the index average of 85," he explained. "The non-recessionary average is 87.4, making June’s reading some 5 points below the non-recession average. So one might even say that we are stuck below a non-recession."

"Ever the wet blanket," Slaper noted, the National Federation of Independent Business small business optimism index, after rising for three consecutive months, took a dip.

"This points to expected anemic growth in the second half of the year," he said. "On the positive side, the labor components of the index were higher; the remaining eight measures -- expected sales and plans to make capital expenditures, for example -- were either flat or negative."

Drivers of change

According to the National Association of Home Builders/Wells Fargo Housing Market Index, builder confidence in the market for newly built, single-family homes rose four points to a reading of 53. Passing the 50 threshold is significant because it means that more builders view sales conditions as good rather than poor.

Based on the Institute of Supply Management’s Purchasing Manager’s Index, economic activity in the manufacturing sector expanded for the 13th consecutive month in June. The June PMI did slip 0.1 percentage points from May, registering 55.3, and countervailing the upward pressure due to the HMI and the transportation and logistics components of the index.

The auto component of the LII rose by 0.1 percent. While unfilled orders for automobile bodies and parts -- the auto sector component of the LII -- has continued to increase month to month, the increase does not reflect the very healthy level of auto sales observed over the past few months, Slaper said.

Along with the general stock market exuberance, the transportation and logistics component of the LII, the Dow Jones Transportation Average, continued to "defy gravity" by rising 1.2 percent in June, he noted.  The interest rate spread was unchanged.

About the Leading Index for Indiana

The Indiana Business Research Center in the Kelley School of Business, with offices on Indiana University's Bloomington and Indianapolis campuses, produces the monthly index. The LII was developed for Hoosier businesses and governments to provide a signal for changes in the general direction of the Indiana economy. In contrast to The Conference Board's Leading Economic Index and other indexes that are national in scope, the LII uses national-level data for key sectors that are important to the Indiana economy. The reason the LII uses national level data is because national data are timelier than state-level data.

Leading Index for Indiana

Leading Index for Indiana

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Timothy Slaper

Timothy Slaper

Print Quality Photo

George Vlahakis
Timothy Slaper