The Indiana Business Research Center says the harsh winter and labor concerns sent the Leading Index for Indiana tumbling in February. The analysis also suggests small business optimism continues to “tread water,” well below pre-recession levels.

February 25, 2014

News Release

Bloomington, Ind. — The Leading Index for Indiana tumbled in February to 101.0, a chilling 0.6 descent from a revised January reading of 101.6.

“All components of the index fell,” said Timothy Slaper, director of economic analysis at the Indiana Business Research Center at Indiana University. “Many blame the bitter weather for the cooling of economic activity or indicators of future economic activity. Others blame global warming.”

The economic index is produced monthly by the IBRC in IU's Kelley School of Business.

Despite the Institute for Supply Management manufacturing index losing an eye-popping 5.2 percentage points in January, economic activity in the manufacturing sector still expanded for the eighth consecutive month, and the overall economy grew for the 56th consecutive month, according to the nation's supply executives in the latest Manufacturing ISM Report on Business.

The Gallup Economic Confidence Index dipped to -18 for the week ending Feb. 9, as Americans are increasingly pessimistic about the economy's direction. This seems to jibe with the Thomson Reuters/University of Michigan's final index of consumer sentiment slipping to 81.2 in January, down from the 82.5 posted in December but up from the preliminary January reading of 80.4.

On the other hand, small business optimism marginally improved — up 0.2 points and landing at 94.1.

“While better than falling, the index remains well below the pre-recession average of 100,” Slaper said.

On the positive front, owners did find a reason to be more positive about their own sales and plan more hiring. However, owners continue to find inventories “too high,” and sales and earnings trends continued to deteriorate for more owners.

“In other words, the small business optimism index is still just treading water,” Slaper said.

Drivers of change

Unusually severe weather conditions across much of the nation, along with continued concerns over the cost and availability of labor and materials, caused home builder confidence as measured by the National Association of Home Builders/Wells Fargo Housing Market Index to post a 10-point drop to 46.

Weather conditions across most of the country led to a decline in buyer traffic last month and builders noted that the weather also hurt retail and auto sales. All three of the major HMI components declined in February. The component gauging current sales conditions fell 11 points to 51; the component gauging sales expectations in the next six months declined 6 points to 54; and the component measuring buyer traffic dropped 9 points to 31.

The Institute for Supply Management’s Purchasing Managers Index registered 51.3 percent in January, a decrease of 5.2 percentage points from December's seasonally adjusted reading of 56.5 percent. The new orders portion of the PMI registered 51.2 percent, a significant decrease of 13.2 percentage points from December's seasonally adjusted reading of 64.4 percent.

The production portion of the PMI registered 54.8 percent, a decrease of 6.9 percentage points compared to December's seasonally adjusted reading of 61.7 percent. The inventories of raw materials portion of the PMI decreased by 3 percentage points to 44 percent — its lowest reading since December 2012. A number of comments from the survey panel cited adverse weather conditions as a factor negatively affecting their businesses in January.

There were 1 million light-vehicle sales in the U.S. in January 2014. This “bad weather” sales figure was down 25.5 percent from December 2013 and down 3 percent from last January 2013. The January 2014 Seasonally Adjusted Annual Rate for light-vehicle sales is 15.2 million. The auto component of the LII fell slightly from last month, by 0.3 percent.

January was not kind to the stock market, and the transportation and logistics component of the LII, the Dow Jones Transportation Average, followed the overall market, falling by 1.5 percent.

The only “good” news for the LII was that there was no bad news on the interest rate front. The spread was essentially unchanged. The Federal Reserve monetary policy undercuts the interest rate spread component of the LII from being a useful indicator to forecast future economy activity.

About the Leading Index for Indiana

The Indiana Business Research Center in the Kelley School of Business, with offices on Indiana University's Bloomington and Indianapolis campuses, produces the monthly index. 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 Business Research Center

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