Indiana economy stays in state of hibernation

Spring has arrived but Indiana is still in a state of hibernation, according to the Indiana Business Research Center at the Kelley School of Business.

According to its website, the IBRC provides and interprets the economic information needed by the state’s business, government and nonprofit organizations. Each month, the IBRC updates its Leading Index for Indiana, a tool used as “an economic monitor to indicate changes in the economy and the strength of those changes,” said Timothy Slaper, director of economic analysis at the IBRC.

The LII started to stagger after reaching a high of 97.34 in January. In February, the LII decreased slightly to 97.31 and then experienced a further slight decrease to 97.21 in March. This staggered movement is what the IBRC refers to as hibernation.

Ryan Krause, the research assistant responsible for updating the LII every month, collects the data necessary to analyze and produce the LII. Each month the LII changes slightly because the data that is used gets updated.

Krause said the IBRC uses raw data available from public services that put out data every month, such as the Census Bureau, the National Association of Home Builders, the Institute for Supply Management and the Federal Reserve.

While The Conference Board uses several different components to produce its Leading Economic Indicator for the United States, the LII is based on just five components.

“Our index in Indiana is a little bit more subdued. The components are not weighted as heavily,” Slaper said. All five of the components factoring into the LII are weighted equally, he said, whereas The Conference Board weighs each of its components differently.

Slaper said he thinks The Conference Board puts too much weight on its interest rate component, causing the economic indicator to be overly optimistic.

The LII has a housing component that tracks “home builder sentiment about the housing market,” Krause said. There is also a general manufacturing component that tracks manufacturing managers’ beliefs about the direction of manufacturing activity. The movement can be classified as increasing or decreasing and speeding up or slowing down.

Indiana is a transportation-heavy state, so there is a component that tracks movement in the Dow Jones Transportation Index. The inventory component tracks the unfilled orders of motor vehicles and parts.

“The more unfilled orders there are, the more demand there is for vehicles and parts,” Krause said. Finally, there is an interest rate component that tracks the interest rate spread between the 10-year Treasury bond and the federal funds rate. This component also reflects the market’s perception of risk in the economy.

Krause said the LII experienced some pretty big growth in the fall due to an increase in the transportation stock index. Manufacturing was also strong at that time, and while its strength continues into the spring, a large roadblock has been the housing market.

Krause said the housing market is still suffering and this is leading to a stalling in Indiana’s economy.

However, Krause said there is no need to worry about this state of hibernation.

“I wouldn’t say we should be worried about the ‘hibernation’ state, but Indiana residents, as well as most of the U.S., should understand that the recovery continues at a very gradual pace.”

He said there is a long way to go until we reach the LII that was recorded before the recession. Pre-recession, the LII reached a high of about 104 in the middle of 2006. In 2007, the recession began, and the LII started to decrease. It reached its lowest value of 94.8 in 2008.

Krause reiterated that the IBRC has seen an increase from these lows but the recovery will continue to be slow.

“We expect the economy to continue to grow,” he said, “but as evidenced by the recent stall in the LII, it will be a slow process, and employment will trail economic growth as it creeps back.”