Newswise — BLOOMINGTON, Ind. -- After pausing for a couple of months, the Leading Index for Indiana moved timidly upward, from 99.4 in July to register 99.6 in August.
"This reluctant step up was driven almost exclusively by the positive news from the housing market, namely, that home builder sentiment continues to improve," said Timothy Slaper, director of economic analysis at the Indiana Business Research Center in Indiana University's Kelley School of Business, which compiles the monthly report.
"Most other components of the index were essentially flat," Slaper added. "The conflicting signals in the components of the LII mirror the inconsistent economic signals in the broader economy. For example, housing starts fell slightly from June to July while building permits -- a signal of future construction -- rose. Both measures were significantly greater than the same period a year ago however."
While the advance retail sales numbers for the month of July were encouraging, consumer sentiment is still in the doldrums, with the Thomson Reuters/University of Michigan consumer sentiment index registering a July value of 72.3. This is down from a June reading of 73.2. The Conference Board Consumer Confidence Index, on the other hand, improved slightly in July.
"While the jobs report earlier this month was a pleasant surprise -- the economy added more jobs than most analysts had predicted -- the recent run-up in gasoline prices, due to both rising crude oil prices and domestic production disruptions, will erode the consumer spending that helps to drive the economy," he said.
This will also prolong the period of many households paying off consumer debt.
"Even with the sheepish step forward of the LII, the overall outlook calls for economic growth that is below modest," he said. "The economic expansion slowed to almost 'stall speed' in the first half of the year, and there is little indication in the recent data that the economy has regained traction."
The bright spot for the Indiana economy, however, is that car sales continue to exceed the 14 million unit sales mark, helping to bolster the state's economic fortunes somewhat.
"The outlook continues to deteriorate as experts are downgrading their expectations for future economic growth," Slaper said. "Just this month, the IMF reduced its forecast for global economic growth in 2012 to 3.5 percent, which, with the exception of 2009, would be the slowest annual growth rate in the last decade."
The Architecture Billings Index saw more poor conditions last month, indicating a drop in design activity at U.S. architecture firms in June and suggesting upcoming weakness in spending on nonresidential construction projects.
Drivers of change
Housing market confidence popped in July, putting strong positive pressure on the LII. The National Association of Home Builders' Housing Market Index increased 6 points from 29 in June to 35 in July, its highest level since March 2007. This month marks the first time the HMI has topped 30 since the housing bubble burst. The regional indexes all rose, with the Midwest regional HMI moving up 3 points from 31 to 34.
Combined with the upward movement in other key housing indicators -- for example, housing starts were up 6.9 percent in June, and single-family permits were up 0.6 percent -- the HMI report adds to the growing evidence that the recovery in housing, while still fragile, may assume its customary role of leading the economy out of recession, or in the current case, prevent a relapse.
Auto sales also continued to surpass expectations in June, rising 22 percent above year-ago levels, with a seasonally adjusted annual sales rate of 14.1 million vehicles. Unfilled orders for motor vehicle bodies, parts and trailers dropped a bit in their latest reading but remain near post-recession highs. Unfilled orders have been steadily increasing since January 2010, a fair proxy for movement in the overall economy.
The transportation and logistics component of the index -- the Dow Jones Transportation Average -- gave the LII a boost, rising in June to reclaim most of the ground lost in May. The stock market has been swinging wildly lately due to global economic concerns.
The overwhelming countervailing force -- the negative pull -- on the LII was the Institute for Supply Management's Purchasing Managers Index. The PMI dropped from last month's level of 53.5 to 49.7 in July. Not only was the drop large, but a value below 50 indicates contracting economic activity. This month marks the first time the PMI has dipped below 50 since July 2009.
The interest rate on 10-year Treasuries dropped again in June, from 1.8 percent in May to 1.6 percent in June, its lowest level on record. The Fed Funds rate remained near zero as part of the Fed's stated policy, so the interest rate spread dropped even further. Rumors have circulated lately that the Fed may embark on another program of quantitative easing this summer if it views a threat to the fledgling recovery.
About the Leading Index for Indiana The LII, developed by the Indiana Business Research Center, 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.
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