The Indiana Leading Economic Index: indicators of a changing economy.

Author:Slaper, Timothy F.
 
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Prediction is very difficult, the Danish physicist Niels Bohr said, especially regarding the future.

Even so, economists and market watchers are often asked what the economic future holds. Businesses want to plan purchases and hiring and make projections about revenues and earnings. Government officials want to know how well tax revenues will match expenditures on programs. Everyone wants to know about, and make adjustments for, dramatic economic downturns such as the current recession.

Economists and market analysts have developed indexes to help anticipate the future direction of the economy in the short-run. The index with the greatest notoriety is probably the Leading Economic Index produced by The Conference Board. The Leading Economic Index represents years of research and analysis but, as robust as it may be, the index is national in scope. It doesn't necessarily reflect the regional dynamics and particular structure of the Indiana economy.

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As a result, the Indiana Business Research Center recently developed an Indiana-specific index of leading economic indicators. This article briefly describes the Indiana Leading Economic Index (ILEI).

Developing the Index

The IBRC took four steps to develop a leading economic index for Indiana:

  1. Create an index of current economic activity and, in contrast to national recessions and expansions, use it to identify Indiana economic activity.

  2. Identify key sectors that tend to guide economic activity in Indiana.

  3. Find measures of economic activity at either the national level or state-specific level that predict movements in those key Indiana sectors.

  4. Combine these indicators to produce a leading index for economic activity in Indiana.

In order to predict recessions, we must be able to identify the beginning and the end of recessions. This is done using a coincident index. A coincident index measures current economic activity. Several other states have developed indexes of leading economic indicators--Iowa, Oregon, Nevada and Ohio--and used total nonfarm employment as their coincident index.

The National Bureau of Economic Research (NBER) defines recession, however, based on the significant decline in a collection of economic indicators. As a result, the IBRC sought a broader set of measures to create a coincident index. The Philadelphia Federal Reserve produces coincident indexes for individual states. Following their lead, the IBRC used nonfarm employment plus the average...

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