IU Kelley School of Business' Leading Index for Indiana rose slightly in October
FOR IMMEDIATE RELEASE
BLOOMINGTON, Ind. -- The Leading Index for Indiana moved up two-tenths of a point in October to 101.8, from a revised 101.6 in September. While home builders turned pessimistic, the transportation component of the index, together with the Purchasing Managers Index and unfilled orders in the auto sector, all rose.
"These current measures of economic conditions have been shown to predict future economic performance in four to six months. That said, the alleged state of 'new normal' that the economy finds itself in is something of a head scratcher," 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 LII does not account for political disruptions in Washington or demand or supply shocks such as spikes in oil and gasoline prices," Slaper added. "The index may point to expected modest growth in five or six months, but with federal budget fights, the short-term avoidance of government default and continued anxiety over the roll-out of the Affordable Care Act, the economic future will likely be bumpy."
According to the Gallup Economic Confidence Index, Americans' confidence in the U.S. economy dropped sharply as the partial government shutdown became a reality. Economic confidence had already been dropping before the shutdown. The Thomson Reuters/University of Michigan preliminary index of consumer sentiment this month fell to its lowest level since January after the partial federal government shutdown, though the decline wasn't as bad as some had forecast. The preliminary October consumer sentiment index fell to 75.2 from 77.5 the previous month. It was the third straight monthly decrease since the index reached a six-year high of 85.1 in July.
Small-business-owner optimism did not crash in September, but it did drop 0.2 points to 93.9 from August's revised reading of 94.1, according to National Federation of Independent Business. The largest contributing factor to the dip was the significant increase in pessimism about future business conditions.
Drivers of change
Home-builder confidence dipped in September, reflecting political uncertainty in Washington and concern about the rise in mortgage rates, according to the National Association of Home Builders/Wells Fargo Housing Market Index.
"Builders sense the buyer euphoria of record-low interest rates is waning while their jitters about the economic future are waxing. Builders are still facing some headwinds of tight credit, shrinking supplies of lots for development and increasing labor costs," Slaper said. "Not only that, but the recent rise in home prices may be somewhat illusory. There is concern that big, institutional investors are buying up properties for cash and are, as a result, the source of buoyancy in home prices. Once these big players leave the market, home prices will again stagnate."
The Institute for Supply Management’s Purchasing Managers Index moved up a half point, from 55.7 to 56.2. Comments from the survey participants were generally positive and optimistic about increasing demand and improving business conditions.
After hitting an important sales marker in August -- 16 million units on a Seasonally Adjusted Annual Rate -- U.S. automobile sales slipped a bit in September to 15.2 million units SAAR. The 1.1 million light-vehicle sales in September 2013 -- not seasonally adjusted -- was a decline of 24.3 percent from August. By comparison, the provisional value of unfilled orders for auto bodies and parts -- provisional given the disruption in federal statistics resulting from the partial government shutdown -- increased 0.9 percent.
The Dow Jones Transportation Average also moved in a positive direction, increasing some 5 percent from August’s close to September’s.
The yield on 10-year U.S. Treasuries edged up and closed September over 100 basis points higher than April.
"Keep in mind that if the 10-year treasury climbs too high or too quickly, it could shatter the fragile housing recovery," Slaper said.
"The big news about Janet Yellen as the nominee to replace Federal Reserve Chairman Bernanke has analysts thinking the Fed is even less likely to prematurely taper asset purchases to expand the money supply and lubricate the economic recovery," he added. "Many economists are worried that the liquidity the Fed is pumping into the economy is merely accumulating as bank excess reserves and, once the banks start lending in earnest, inflation will ignite as the economy overheats."
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.