Leading Index for Indiana

The Leading Index for Indiana (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 more timely than state-level data.) Updated monthly, the LII enables Hoosiers to better understand market conditions in the state.

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Index for December 2009

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While the Leading Index for Indiana (LII) for December continues its unenergetic climb, for the first time since its release in October of last year, the state economic indicator was higher than it was a year earlier.

The LII increased by 0.2 points in December to 96.4. The index limped up in November and improved at a slightly faster pace in December.
Several factors contributed to a stronger rise in the LII more recently, namely, the up-tick in the Dow Jones Transportation Average, the continued large interest rate spread and a strong up-tick in the Purchasing Managers Index. Other components of the index are trailing behind, especially the sentiment of home builders.

The movement of the LII corroborates with the 2010 economic forecast from the Center for Econometric Modeling and Research (CEMR) at Indiana University. In contrast to a “V” shaped rebound, the CEMR forecasted a “U” shaped economy recovery for the United States in general and Indiana more specifically. The large revision downward in the national gross domestic product from the initial release in October seems to indicate a wobbly recovery.

Note: Hover over the lower graph and move the slider to change the time period displayed.

Drivers of Change

• Citing the large number of foreclosed homes for sale and a job market that refuses to improve, home builder confidence declined last month. “At this point, home builders have done everything we possibly can to set the stage for a housing recovery – we’ve thinned our inventories, we’ve kept new construction to a minimum, and we’ve fought for and achieved a great new buying incentive with the extension and expansion of the home buyer tax credit,” said National Association of Homes Builders Chairman Joe Robson, a home builder from Tulsa, Okla.
  
  Even so, home builders continue to be pessimistic. Tight lending conditions for both consumers and home builders continue to pose considerable obstacles for a robust recovery. The housing market index (HMI) declined in each of the four regions. The national HMI fell to its lowest point since June of last year.

• On the other hand, the Dow Jones Transportation Average (DJTA) made sturdy progress in both November and December.

• The Purchasing Managers Index (PMI) produced by the Institute of Supply Management (ISM) made significant upward progress, regaining the ground it lost the previous month, plus a little more. The PMI has been erratic over the last several months, but overall, the index continues to point to an economy in expansion and has been on an upward trend since the beginning of 2009.

• The Federal Reserve has had an aggressive money policy that is keeping the federal funds rate at close to zero. Those who are on the lookout for inflation see this as a recipe for a weakening dollar and future inflation. On the other hand, production levels continue to be well below capacity and unemployment high. As a result, many economists do not consider cost-push inflation a short-to-medium term threat. The large interest rate spread can be seen as a signal for better than expected 2010. When it was inverted or flat for most of 2006, 2007, and the early part of 2008, it correctly foretold of the future economic disaster.

• The auto sector component of the index was essentially flat. Shipments and unfilled orders over the last few months have not rebounded strongly. The sector has a long way to go before closing the gap between “normal sales” and current levels of production. Shipments of motor vehicles and parts in 2009 were about 25 percent lower than in 2008.
  
  Automobile sales forecasts for 2010 have been revised upward recently, but they still remain gloomy. “Normal” output in the auto sector is not anticipated any time soon. Some auto industry analysts predict that 2010 sales may not hit 12 million units. At that level, sales would fall about 4 million units per year less than in 2006 and 2007.

Source: Indiana Business Research Center, Indiana University Kelley School of Business