Leading Index for Indiana drifts downward in January

Jan. 24, 2014


BLOOMINGTON, Ind. -- The Leading Index for Indiana dipped slightly to 101.6 in January, from a revised reading of 101.7 in December.

Home building, manufacturing and automotive components all eased downward, putting slight downward pressure on the economic index, which is produced monthly by the Indiana Business Research Center in Indiana University's Kelley School of Business.

"The trend of equivocal economic data marches on," said Timothy Slaper, director of economic analysis at the IBRC.

The Conference Board Consumer Confidence Index, which had decreased in November, rose in December to 78.1 from 72.0. This measure of consumer sentiment had not been that high 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," Slaper said. "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," Slaper said. "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."

The Gallup Economic Confidence Index corroborates this view. 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," he said.

But another measure, 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 United States, 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," Slaper added. "On the positive front, reports of capital spending rose significantly in December, increasing by 9 points from November, and job creation among firms surveyed by the National Federation of Independent Business was the best since February 2006. One can hope that the baby steps of some small business 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," Slaper said.

The Institute for Supply Management’s Purchasing Managers Index 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 United States. 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.

Slaper said the Federal Reserve monetary policy undercuts the interest rate spread component of the LII.

"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," he said. "A strong upward movement in interest rates would knock the knees out of the housing recovery."

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.