About the Leading Index for Indiana
Economists and market analysts have developed indexes to help anticipate the future direction of the economy in the short-run. The Indiana Business Research Center developed the Leading Index for Indiana™ (LII) to reflect the regional dynamics and particular structure of the Indiana economy. The LII uses national level data for key sectors that are important to 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 for economic activity.
Indiana (Note: National data are used for the index components since national data are more timely than state-level data.)
Monthly. The data comprising the leading index are released with a six-week lag.
July 1997 - forward
Historical values of the LII are revised to take into account revisions in the source data. The Census Bureau regularly revises data. The National Association of Home Builders/Wells Fargo Housing Market Index (HMI) is also periodically revised.
As reported with the May 2010 release of the LII, the LII reflects revisions in the value of unfilled orders for motor vehicles and parts reported by the Census Bureau. The revision, which extends back several years, does not materially affect the rates of change in the data series, but it does affect the level of the LII. Users that may analyze historical trends in the LII are encouraged to update the entire data series to eliminate discontinuities in the data.
The LII is comprised of 5 indicators to highlight the 3 supersectors that significantly affect economic activity in the state (manufacturing; transportation and trade; and finance, insurance and real estate).
Manufacturing Purchasing Managers Index (PMI)
The PMI is commonly used as a national leading indicator. Based on a national survey of supply and purchasing managers, the PMI measures month-to-month changes in business sentiment. The PMI measures changes, positive or negative, in expectations for business in the present and coming months.
Source: Institute for Supply Management
Unfilled Orders for Motor Vehicles and Parts
The unfilled orders of motor vehicles and parts data are published monthly. The rationale for including this measure is that unfilled orders tend to decline before recessions.
Source: U.S. Census Bureau
Dow Jones Transportation Index
The Dow Jones Transportation Index tracks 20 transportation and logistics companies. Indiana, as the crossroads of America, has a relatively large transportation and logistics sector. Since stock prices tend to be forward looking, it stands to reason that it would be a component in Indiana’s leading index.
Source: Dow Jones & Company
Housing Market Index
The Housing Market Index (HMI) is published monthly and uses surveys of home builders to gauge the level of confidence in the real estate and construction industry.
Interest Rate Spread
The interest-rate spread measures the extent to which investors anticipate a recession in the near future. The spread, the yield on 10-year Treasury bonds minus the Federal Funds Rate, has become negative before all recessions since 1970.
Source: IBRC, using data from the Federal Reserve
A warning sign occurs when at least 3 out of the 5 indicators turn negative and the LII declines overall. Several consecutive months of warning signs signal an impending recession (or continued deteriorating conditions if the economy is already in recession).
The article, "The Indiana Leading Economic Index: Indicators of a Changing Economy" in the Fall 2009 issue of the Indiana Business Review provides additional background concerning the development of the LII.