Leading Index Inches HigherPosted: Updated:
The Leading Index for Indiana is up slightly for July. The Indiana Business Research Center says job creation plans for small businesses have increased, but expectations for improved business conditions are still negative. The center says the housing component of the index continue to soar, while the transportation component fell. July 19, 2013
BLOOMINGTON, Ind. -- The Leading Index for Indiana ended its swoon in July but moved up an unconvincing 0.2 points to 100.9. The Housing Market Index, a component of the LII, continued to soar. On the other hand, the transportation component of the index fell, moderating the climb of the LII.
"U.S. consumers pulled back some of their optimism about the future economy, but they are still upbeat about current conditions. And while job creation plans for small businesses increased slightly in June, expectations for improved business conditions remained negative," said Timothy Slaper, director of economic analysis at the Indiana Business Research Center in Indiana University's Kelley School of Business. The IBRC produces the monthly index.
The preliminary Thomson-Reuters/University of Michigan index of consumer sentiment for July fell to 83.9 from a final June reading of 84.1. At the same time, the National Federation of Independent Business' Index of Small Business optimism also cooled somewhat, as the monthly economic index retreated 0.9 points to 93.5 -- 7 points below the pre-2008 average.
"The NFIB index has been in a see-saw for months," Slaper said. "There is no reason for small employers to be more optimistic and lots of things to worry about."
For example, economic growth was revised down for the first quarter, and the outlook for the second quarter is also weak. And the seemingly endless stream of delays and capitulations of certain provisions of the health care law also adds to uncertainty.
While Main Street might be less optimistic, the jet set is more optimistic, according to The Conference Board Measure of CEO Confidence. The measure for the second quarter now reads 62, up from 54 last quarter. A reading of more than 50 points reflects more positive than negative responses.
"CEOs are more upbeat about short-term growth prospects, and their appraisal of current economic conditions also improved," Slaper said.
The American Institute of Architects Architecture Billings Index moved back into growth territory, with architecture firms reporting growth in nine of the past 10 months. Inquiries for new design projects also pointed to a modest acceleration, suggesting that future workloads will continue to expand.
"There were some worrisome signs, however," Slaper said. "The Midwest did not participate in the upturn, as the ABI reading for firms in this region fell to 47.5 -- its second straight monthly decline. Another concern is rising interest rates. Higher rates would slow the home building recovery and negatively affect nonresidential construction activity, since higher financing costs could adversely affect the feasibility of some construction projects."
Drivers of change
For the second month in a row, the National Association of Home Builders/Wells Fargo Housing Market Index set off fireworks. The HMI rose another 6 points to 57, reflecting an increasingly optimistic mood in home building. (A reading over 50 indicates that more builders view sales conditions as good than poor). There was improvement in builder confidence across every region -- the Midwest index shot up 8 points -- as well as solid gains in current sales conditions, traffic of prospective buyers and sales expectations for the next six months.
Home builders are seeing more motivated buyers coming through their doors as the inventory of existing homes for sale continues to tighten. Meanwhile, as the home-building supply infrastructure returns, some previously skyrocketing building material costs have begun to soften.
After a brief visit in the basement, the Institute for Supply Management's Purchasing Managers Index climbed back up to the first floor, rising 1.9 points to 50.9. (Above 50 is sign of an expanding manufacturing sector.) The indexes for new orders and production moved even more strongly upward. But the index for employment swung in the opposite direction, from mildly growing to contracting.
The U.S. automobile industry had a banner month in June, selling 1.4 million light vehicles. The June seasonally adjusted annual rate, or SAAR, for light vehicle sales was 15.9 million units. The last SAAR value to surpass this value was in November 2007 at 16 million units. Unfilled orders for auto bodies and parts, the auto sector component of the LII, also rose about 0.5 percent.
The news for the components of the LII was generally good save for the transportation and logistics sector. The Dow Jones Transportation Average fell 1.9 percent, erasing the gains from last month.
"What's up? The yield on 10-year U.S. Treasuries," Slaper said. "The yield on July 1 was 94 basis points higher than the first of May. Who cares? Anyone who is buying a house or interested in refinancing."
While still low historically, the nearly 1 percent climb in the 10-year Treasury yield over the last two months has attracted a lot of attention. It could clobber, or at least temper, the mortgage market rebound and, hence, in the home building market. Mortgage rates have increased about 1.5 percent on conventional loans. That translates into a home buying affordability decrease of about 15 percent.
"What does this have to do with the direction of the LII? Very little," Slaper said. "The interest rate spread -- a component of the LII -- still isn't performing its traditional role as an indicator of the future direction of the national or state economy. That said, the rise in mortgage rates may adversely affect home buying, home building and consumers' discretionary income. And that has a distinct effect on economic activity."
The 2013 release schedule for the LII, as well as historical data, is available online.
About the Leading Index for Indiana
The 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 timelier than state-level data. Source: Indiana University