The Indiana Business Research Center says the monthly Leading Index for Indiana has inched upward for September. IBRC Director of Economic Analysis Tim Slaper says the outlook for the months ahead is “choppy” with federal budget and debt ceiling negotiations in Washington and continuing concerns about implementation of the Affordable Care Act. September 20, 2013

News Release

BLOOMINGTON, Ind. — Reflecting a slip in the transportation component of the Leading Index for Indiana and mixed data, the state's economic index moved up slightly, by 0.1 points, in September to 101.5.

The Purchasing Managers Index and unfilled orders in the auto sector were “fundamentally flat,” as was home builders’ optimism, 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.

“Given the unconvincing movement of the LII, the prospects for political disruptions in Washington — federal budget fights and a debt ceiling imbroglio — that will likely have negative economic spillover effects, all combined with continued anxiety over the roll-out of the Affordable Care Act, and one can say with reasonable certainty that the outlook will be choppy,” Slaper said.

Industrial production did advance by 0.4 percent in August, according to the Federal Reserve, after having been unchanged in July; the gains in August were broadly based. Following a decrease in July of 0.4 percent, which was steeper than previously reported, manufacturing production rose 0.7 percent in August.

But consumer confidence in the U.S. declined in September to the lowest level since April, indicating household spending may take time to pick up. The Thomson Reuters/University of Michigan preliminary index of consumer sentiment this month fell to 76.8 from August's 82.1.

“Consumers still have things to worry about, and this may be the reason that retail sales rose less than forecast in August. Remove August auto sales — which are something to crow about — and retail sales were essentially unchanged from July to August,” Slaper said.

Slaper believes that small business optimism is in a virtual holding pattern, as small businesses, like so many market and political watchers, are holding their collective breath about a government shutdown, a debt ceiling fight and the ticking “Obamacare clock.”

“Given that small businesses — those with fewer than 50 workers — in Indiana account for half of the job growth in the Hoosier state, and likely in most other states too, and given that small businesses are allegedly most negatively affected by the ACA, it makes one wonder why Washington doesn’t conduct an experiment on the purported negative employment effects of the ACA,” he said.

“The experiment presents risks for both sides of the political aisle. Put the ACA on permanent but provisional hold for 18 months. If the job creation rate is twice that for the next 18 months compared with the last 18 months, then the ACA is permanently repealed,” he added. “The ACA will have been shown to be the job killer it is suspected to be. If job creation is still sluggish, as it has been over the last four years, the ACA is not to blame. Obamacare goes into full effect and the president can tell all the ACA naysayers 'I told you so.'”

Drivers of change

Home builder confidence hit the pause button in September, reflecting uncertainty surrounding the rise in mortgage rates. While the National Association of Home Builders/Wells Fargo Housing Market Index is at the highest level in nearly eight years at 58, builders sense the buyer euphoria of record-low interest rates is probably a thing of the past. Builders are also facing some headwinds of tight credit, shrinking supplies of lots for development and increasing labor costs.

The Institute for Supply Management’s Purchasing Managers Index barely moved, edging up an almost imperceptible 0.3 points, from 55.4 to 55.7. The sub-indexes were mixed. The New Orders Index increased in August by 4.9 percentage points to 63.2 percent, but the Production Index decreased by 2.6 percentage points to 62.4 percent and the Employment Index registered 53.3 percent, a decrease of 1.1 percentage points.

The seasonally adjusted annual rate for light vehicle sales was 16 million units. The August 2013 year-to-date auto sales figures bring total light vehicle sales to 10.6 million — up 9.6 percent from a year ago.

“While auto sales are something to shout about,” Slaper said, “the auto sector component of the LII, unfilled orders for auto bodies and parts, dropped almost 1 percent.”

The Dow Jones Transportation Average also moved in the wrong direction, falling over 3 percent, but the fall was less than the Dow Jones Industrial Average.

The yield on 10-year U.S. Treasuries keeps moving onward and upward. The news surrounding Federal Reserve has moved from when chairman Ben Bernanke will slowly bring quantitative easing to a close to who will replace him.

“If the 10-year treasury climbs too high or too quickly, it will put a damper on the fragile housing recovery,” Slaper said.

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

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