Leading Index Inches Upward

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The Indiana Business Research Center says "upbeat" metrics in the automotive sector helped drive a slight increase in December's Leading Index for Indiana. Director of Economic Analysis Tim Slaper says increasing home builder confidence also added to the improvement. December 19, 2013

News Release

INDIANAPOLIS, Ind. - In December, the Leading Index for Indiana (LII) moved up, but just barely, to 101.8, an increase of a mere 0.1 from a marginally revised November.

The home building, manufacturing and transportation and logistics components rose while the automotive component seems to be shrugging off the good news that auto sales will likely close the year above 15 million units.

There are a series of upbeat metrics in the auto sector. It looks as if December new vehicle sales will be in the 1.5 million unit range, a gain of 10 percent vs. last December based on several indicators (from CNW Marketing Research). Floor traffic surged during the opening half of the month, nearly 18 percent higher than a year ago. More than half of the showroom shoppers are within a few weeks of making a vehicle acquisition, they tell CNW. Add to the higher floor traffic a strong increase in closing ratios and the foundation for a solid sales month gets stronger, increasing 6.5 percent vs. last month. With same-store sales up more than 11 percent in the first half of December and sub-prime approvals slightly ahead of last month, the only potential downside is the rising Jitters Index. Consumers are still a little anxious.

The Conference Board Consumer Confidence Index, which had decreased sharply in October, declined again in November. The Index now stands at 70.4 (1985=100), down from 72.4 in October. The Present Situation Index edged down to 72.0 from 72.6. The Expectations Index declined to 69.3 from 72.2 last month. Consumers who were surveyed expressed a view that the job market had strengthened, while economic conditions had slowed. When looking ahead six months, consumers expressed greater concern about future job and earning prospects, but remain neutral about economic conditions. "All in all, with such uncertainty prevailing," said Lynn Franco, Director of Economic Indicators at The Conference Board, "this could be a challenging holiday season for retailers."

In contrast, the Thomson Reuters/University of Michigan preliminary index of consumer sentiment tells a different story. U.S. consumer sentiment surged in December as Americans' outlook on the economy and job prospects improved. The Thomson Reuters/University of Michigan's preliminary reading on the overall index on consumer sentiment jumped to 82.5 for December, up from a final reading of 75.1 in November. This was the highest reading for the index since July. This uptick in consumer confidence is corroborated by the Gallup Economic Confidence Index. Based on the Gallup Index, Americans were much more upbeat about the U.S. economy in November than they were in October, but are still less confident than they were in the months before the federal government shutdown. Gallup's Economic Confidence Index rose 10 points November, the first month that the index has improved since May.

After several months of unmixed gloom, the views and expectations of small-business owners were somewhat improved. Owners' optimism increased, but only slightly, according to National Federation of Independent Business monthly index. Moreover, small-business employment is better at the end of this year than last year, but not enough to restore the 2007 level hiring. On the discouraging side, uncertainty remains throughout the sector, as it anticipates increased taxes, regulations and healthcare costs. Owners are getting a sense of what Obamacare might mean for labor costs. Their distress about the cost and availability of insurance moved up another 3 points last month, after a long period of no real change. After millions of individuals lost their private health insurance plans this month because they didn't measure up to the Affordable Care Act dictates, business owners are increasingly concerned that their insurance plans will also be "unacceptable" and will be obliged to either pay more for the coverage or abandon providing health insurance directly and pay the benefit in cash.

"Given the stronger than expected employment gains in November, the Fed announced that it would start ramping down - "tapering" - the rate that it is expanding the money supply, also known as quantitative easing. The stock market shrugged of what conventional wisdom previously considered bad news and continued its ascent yesterday."

Drivers of Change

Home builder confidence improved. The recent rise in mortgage interest rates has not deterred consumers as once was greatly feared as rates are still near historically low levels. Following a two-month pause in the index, the uptick is due, in part, to the evidence of pent-up demand caused by the uncertainty generated by the October government shutdown.

The Institute for Supply Management’s Purchasing Managers Index (PMI) moved up from 56.4 to 57.3 percent, an increase of 0.9 percentage point. The PMI has increased each month since June, with November's reading the highest of the year. The New Orders Index increased in November by 3 percentage points to 63.6 percent, and the Production Index increased by 2 percentage points to 62.8 percent. In short, economic activity in the manufacturing sector expanded, say the nation's supply executives.

November 2013 year to date figures bring total light-vehicle sales to 14.2 million, up 8.3 percent from a year ago. The November 2013 Seasonally Adjusted Annual Rate (SAAR) for light-vehicle sales was 16.3 million, the highest recorded SAAR value for 2013. While last month’s auto sales are something to crow about, the value of unfilled orders for auto bodies and parts – the auto component of the Index – decreased 0.7 percentage point.

The transportation and logistics component of the Leading Index – The Dow Jones Transportation Average – continues its march upward, rising 3.7 percent in November.

After falling about 20 basis points in October, the yield on 10-year U.S. Treasuries rose 10 basis points in November. Given the stronger than expect employment gains in November, the Fed may ramp down the rate that it is expanding the money supply, a.k.a., quantitative easing (QE) sooner than expected. It will be revealing how the financial markets will react to even discussion of such policies.

Data Revisions

The historical series for the LII reflects regular monthly revisions in source data. Users that analyze historical trends in the LII are encouraged to update the entire data series to eliminate discontinuities in the data.

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