The Leading Index for Indiana (LII), defying the generally poor economic news, edged up slightly in September, moving from 99.5 in August to 99.7 this month.
The LII, developed by the Indiana Business Research Center, is designed to reflect the unique structure of the Indiana economy. It is a predictive tool that signals changes in the direction of the economy several months before the economy has changed. In contrast to economic forecasts, which use sophisticated statistical models to foretell particular levels for a wide variety of economic activities and outcomes in the future, a leading index is a simple construct that indicates a general direction of future economic activity expected in the next five to six months.
The LII in September tells much the same story as in previous months: inconsistent economic signals, an economy that has lost any mojo from earlier in the year, but an economy that does not yet appear to be on the precipice of a double-dip recession.
The Center for Econometric Model Research forecasts that, without the fiscal cliff, economic growth for 2013 would be about 2.3 percent, but if the economy is driven off the fiscal cliff, the economy is expected to shrink by about 0.5percent in the first two quarters of 2013.
Drivers of change
The expectations of home builders gave the LII another boost this month with the National Association of Home Builders’ Housing Market Index increasing 3 points,from 37 in August to 40 in September. Unlike last month, however, the gainswere shared across all four regions, with the Midwest increasing from 41 inAugust to 45 in September. The 3-point rise in the HMI was sufficient to give the LII lift.
The Institute for Supply Management’s Purchasing Managers Index moved into the “economic contraction” zone in July and fell further in September to 49.6, putting downward pressure on the LII. A PMI reading of below 50 signals contracting economic activity in the manufacturing sector.
The transportation and logistics component of the index — the Dow Jones Transportation Average — deflated slightly more in August, retreating another 1.6 percent and putting downward pressure on the LII. The August “waste economic index” measure for rail traffic that tracks well with current economic output — not future economic output like the LII — was 15 percent lower compared to last year, an indication that third-quarter GDP will likely show an economy that has lost steam.