updated: 5/18/2012 12:53:51 PM

Leading Index Rises

InsideINdianaBusiness.com Report

More confidence in the housing market and slight growth in the auto sales sector have led to an increase the Leading Index for Indiana. The Indiana Business Research Center says the 98.5 value for May is the highest since August 2008.

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May 18, 2012

News Release

The May LII sustained its steady, if modest, climb back toward its pre-recession levels. The April LII was revised upward too, ratcheting up an additional tenth of a point to 98.3 (formerly 98.2). The May LII now sits at 98.5, a post-recession high and its highest level since August 2008.

The Ceridian-UCLA Pulse of Commerce Index™ (PCI), another economic indicator, also seems to be on the rise of late. The index has risen for three consecutive months. However, the PCI remains 1.9 percent below its level from April 2011. Easing fuel prices may have contributed to the index’s recent growth.

The good economic news also extends to improving consumer sentiment. The Thomson Reuters/University of Michigan (TR/UM) index of consumer sentiment has risen two months in a row. The preliminary number for May shows a significant jump to 77.8 from April’s 76.4 mark. Consumers were more upbeat about employment prospects and the easing of gasoline prices also provides consumers more budgetary breathing room.

Overall, the picture looks rosier for Indiana’s economy, but would not warrant saying that the Hoosier economy is poised for breathtaking growth in the coming months. Based on the most recent projections by the Center for Econometric Model Research at Indiana University, the forecast for the remainder of the year continues what has become the mantra of positive, but sluggish, economic growth. The sustained slow recovery will be devoid of strong surges in personal income or payroll employment. In the first quarter of 2012, the state had employment growth at a 3.4 percent annual rate from the prior quarter with a gain of 24,000 workers. Solid growth is anticipated for the remainder of the year with a gain of about 60,000 jobs – which would be a significant improvement on the 2011 increase of 35,700 workers.

Drivers of Change

Housing market confidence broke out of its slump. The National Association of Home Builders’ Housing Market Index (HMI) increased from a revised April number of 24 to 29 in May, its highest level since May five years ago. This jump gave the May LII most of its lift.

As NAHB Chairman Barry Rutenberg stated, “It seems we have resumed the gradual upward trend in confidence that started at the beginning of this year, as stabilizing prices and excellent affordability encourage more people to pursue a new-home purchase.” That said, there are still significant impediments in the housing market: builder and consumer access to credit, inaccurate appraisals, and, more recently, rising materials prices.

The Institute for Supply Management’s Purchasing Managers Index (PMI) rose again, increasing from 53.4 to 54.8. As the index remains above 50, manufacturing activity continues to grow, and most signs look positive. The ISM notes that 16 of the 18 industries surveyed reported growth in April, and the only industry that reported contraction was wood products.

Auto sales have shown some positive signs over the past few months, but slightly less positive in April. Car sales were up only 2.1 percent over April 2011 sales, compared with March’s year-over-year increase of 13 percent. Still, signs remain positive. Unfilled orders for motor vehicle bodies, parts and trailers rose in March to their highest level since October of 2009. This is especially encouraging. Unfilled orders declined steadily well into the recession and only began recovering in the fall of 2010. Since then, they have been on a slow, but steady, climb.

The transportation and logistics component of the index—the Dow Jones Transportation Average—was the only component that put any significant downward pressure on the LII. The Average dropped from 5253 to 5230 in April, reflecting an overall swoon in the stock market.

The interest rate on 10-year Treasuries continued to hover around 2 percent in April. The Fed Funds rate remained near zero as part of the Fed’s stated policy, so the interest rate spread was, effectively, unchanged. The generally low inflationary pressures and delicate state of the recovery, together with excess production capacity, will allow the Fed to continue its policy of maintaining low interest rates for an extended period.

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

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