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.
Notice to Users: Regular production of the LII has been discontinued as of October 2014. The interest rate component of the LII has been made useless due to Federal Reserve policy, and the yield spreads that once foretold of changes in economic growth have proven to be less reliable. A study by Wells Fargo Securities has documented that, post Great Recession, the relationship between the interest rate spread and GDP growth is questionable at best. While the interest rate spread is only one of five components of the LII, the tenuous relationship in this component would require a rethinking and reconfiguring of the LII.
Indiana (Note: National data are used for the index components since national data are more timely than state-level data.)
July 1997 - October 2014
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.
Most recently and notably, revised historical data for manufacturers' shipments, inventories, and orders were issued on May 17, 2013. These revisions reflect the Annual Survey of Manufactures benchmarks for prior years, incorporating the unfilled orders to shipments ratios obtained from the 2010-2011 Manufacturers' Unfilled Orders Survey and applying these ratios to the respective ASM shipments data, as well as incorporating revised unfilled orders to shipments ratios for prior years. While this revision affects the level of the data series, it does not influence the change period to period. 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 decline by more than 5 percent 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.