Leading Index Dips Slightly

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The Indiana Business Research Center says home building, manufacturing and automotive sectors applied "slight downward pressure" on January's Leading Index for Indiana. The analysis also suggests a "cooling off in spending" is coming for the first quarter. January 24, 2014

News Release

INDIANAPOLIS, Ind. - In January, the Leading Index for Indiana (LII) drifted down to 101.6, a 0.1 descent from a revised December reading of 101.7.

The home building, manufacturing and automotive components all eased down a smidge, putting slight downward pressure on the LII.

The trend of equivocal economic data marches on. The Conference Board Consumer Confidence Index, which had decreased in November, rose in December. The index now stands at 78.1 (1985=100), up from 72.0 in November. Sentiment regarding current conditions increased to a high not reached since April 2008. The pulse of consumers, taken before the disappointing January jobs report, suggested that consumers attributed their greater confidence to more favorable economic and labor market conditions. In December, consumers expressed a greater degree of confidence in future economic and job prospects, but were moderately more pessimistic about their earnings prospects.

The Thomson Reuters/University of Michigan preliminary index of consumer sentiment unexpectedly declined in January, a sign that spending may take time to accelerate early this year. The preliminary index of sentiment fell to 80.4 from 82.5 in December. The report follows figures last week showing that employment rose in December at the slowest pace in almost three years. While more job opportunities would help lift spirits, higher property values and rising equity prices are boosting household wealth and are expected to keep consumers spending. On balance, there will likely be some cooling off in spending in the first quarter.

This downward drift in the Thomson Reuters/University of Michigan consumer confidence index is corroborated by the Gallup Economic Confidence Index. Based on the Gallup measure, Americans' confidence in the economy slipped, ending the gradual rise that coincided with the end of the federal government shutdown in mid-October. Economic confidence is likely related to the federal government reporting the weakest job growth in three years for the month of December and a declining unemployment rate, signaling that disgruntled job seekers are dropping out of the labor force.

The Conference Board and PwC Measure of CEO Confidence, which had pulled back in the third quarter, increased in the fourth quarter of 2013. The measure now stands at 60, up from 54 in the previous quarter. CEOs' expectations for growth in the U.S., Europe, Japan and China remain upbeat.

CEOs' short-term outlook has also improved. Currently, 50 percent of business leaders expect economic conditions to improve over the next six months, up from 42 percent in the third quarter.

Small business optimism also ended the year up slightly. On the positive front, reports of capital spending rose significantly in December, increasing by 9 points from November and job creation among NFIB firms was the best since February 2006. One can hope that the baby steps of some small businesses to create jobs and invest in capital forecast a better 2014.

Drivers of Change

Home builder confidence was essentially flat. Following an unexpected jump last month, builder confidence leveled out. It is expected that rising home prices, historically low mortgage rates and significant pent-up demand will drive a continuing, gradual recovery in the year ahead. However, the pace of the recovery could be stronger were it not for rising construction costs and inaccurate appraisals that are keeping some home sales from going through.

The Institute for Supply Management’s Purchasing Managers Index (PMI) moved down from 57.3 to 57.0 percent, a decrease of 0.3 percentage points. While this was a decline, expectations were for a decline to 56.8. The reading above 50 shows that economic activity in the manufacturing sector expanded in December for the seventh consecutive month.

In December, there were 1.4 million light-vehicle sales in the U.S. The December 2013 sales figure brings total light-vehicle annual sales to 15.5 million, up 7.5 percent from last year’s annual sales figure of 14.4 million light-vehicle sales. That said, the auto component of the LII lost ground, falling 0.7 of a percentage point.

The only strong gainer comes from the stock market. The transportation and logistics component of the LII, the Dow Jones Transportation Average, did what the market has done all year by increasing another 2.3 percent in December.

The Federal Reserve monetary policy, as has been mentioned many times before, undercuts the interest rate spread component of the LII from being a useful crystal ball to forecast future economy activity. One may expect some volatility in the treasury security yields as the market digests the expectations of the “tapering” of Fed security purchases together with the disappointing jobs report earlier this month. As noted previously, a strong upward movement in interest rates would knock the knees out of the housing recovery.

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.

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