By Larry DeBoer
An unsettling number popped up on my computer screen recently. The index of leading economic indicators for Indiana decreased in August. It was the first decline since April 2009, during the Great Recession.
The leading index is “leading” because it is made up of economic measurements that change before the general economy. If a recession is coming, the leading indicators drop first. If a recession is about to end, and a recovery will begin, the leading indicators start moving up first.
For example, the number of new people applying for unemployment insurance is a leading indicator. When someone gets laid off, one of the first things they’ll do is apply for benefits. No economic survey is needed to measure that change. The unemployment offices report the data weekly, so if business activity is declining, the benefit application data will show it first.
The state leading indicators are compiled by the Philadelphia Federal Reserve. You can find them at philadelphiafed.org. Click on “Research and Data” and then “Regional Economy.”
The leading index dropped by 0.6 percent in August. That means the Indiana economy is expected to decline by that much during the next six months, through February 2018.
The current condition of the Indiana economy is measured by — you guessed it — another index. The coincident index moves up and down with actual conditions during the month. It dropped in August too, by 0.4 percent. That was the first decrease in almost five years.
The coincident index is closely related to Indiana total employment and to the Indiana unemployment rate. In August the total number of people on Indiana business payrolls dropped by a few thousand, and the Indiana unemployment rate went up from 3.1 to 3.5 percent. That was enough to bring the coincident index down.
The August leading index dropped for two reasons.
There was an unusually large increase in the number of people applying for unemployment insurance in August. And, the coincident index fall helped cause the leading index drop.
That sounds mixed up — the leading index is supposed to predict the coincident index, not the other way around. Turns out that the coincident index is pretty good at predicting itself, so it’s a leading indicator. When the coincident index declines, it often keeps declining, enough to produce a six-month drop in the economy.
How accurate is the index of leading economic indicators for Indiana? Not bad, actually. I’ve got numbers on the index back to January 1982. That’s 428 months. Before August, in 36 of those months the leading index predicted a coming six-month decline in the Indiana economy.
Twenty-six of those predictions proved correct. Almost three-quarters of the time, when the leading index said there would be a decline, there was. In the other quarter, the leading index predicted a six-month decline, but the economy grew instead.
The leading index was wrong.
Indiana was not alone in August. The entire Great Lakes region saw its leading indexes fall that month. Most of those states had declines in their coincident indicators too. They all had increases in their unemployment rates, and Illinois and Wisconsin had decreases in total employment, like Indiana.
Back during the Great Recession, the leading index dropped for 14 months in a row. Usually the index has to drop for three straight months before it really predicts a recession. One month isn’t enough. The Philadelphia Fed hasn’t published the September index yet. But some of the data that make them up are available.
The good news is that Indiana employment grew in September. New applications for Indiana unemployment benefits dropped a lot. The bad news is that the unemployment rate went up again, to 3.8 percent. So it’s possible that the Indiana leading index will read positive when it’s announced for September. If the unemployment rate increase looms large, though, it could be negative too.
The Indiana leading economic indicator index has dropped for the first time in eight and a half years. Should we panic? No. Should we be worried? Not really. Concerned? Still too strong.
Put me down as “interested.” I’ll be interested to see what the next readings are. If they’re positive, you can forget you read this. If they’re negative — that’s even more interesting.
Larry DeBoer is professor of agricultural economics at Purdue University. Send comments to firstname.lastname@example.org.