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RE:
Iowa Leading Indicators Index August 2015 Report
From:
Iowa Department of Revenue
Date:
October 2, 2015
The Iowa Leading Indicators Index
(ILII) decreased to 107.1 (100=1999) in August 2015 from 107.5 in July. The monthly
diffusion index increased in August to 25.0 from 12.5 in July, with two of the
eight components experiencing positive changes.
The ILII has dropped for eight
consecutive months, with the magnitude of the drop reflected in the annualized
six-month change of -4.6 percentage points in August, down from -4.1 percentage
points in July. However, the six-month diffusion index rose to 31.3 in August from
25.0 in July with a gain in the signal from manufacturing hours. August continued
the recent trend of the index meeting the two key metrics that when seen together
are considered a signal of a coming contraction: a six-month annualized change
in the index below -2.0 percent and a six-month diffusion index below 50.0. Five
of the eight components (agricultural futures profits index, diesel fuel
consumption, Iowa stock market index, new orders index, and residential
building permits) experienced a decrease of greater than 0.05 percent over the
last half a year, while average manufacturing hours experienced a six-month change
between 0.05 and -0.05.
Although the weakness is stemming
largely from Iowa’s agricultural sector and spillovers into manufacturing, the
widespread weakness across the index components in August suggests future softness
in Iowa’s overall economy. One of the most visible negative components in August
was the stock market swoon that experts are referring to as a correction event.
The Conference Board Leading Economic
Index (LEI) for the nation increased in August, pushing up its six-month annual
growth to 4.7 percent. Likewise, Iowa’s non-farm employment index continued in
its fifth year of growth in August. However, the ILII’s recent moves suggest
that Iowa employment growth will slow and possibly contract this fall.
The two positive contributors in August
were average manufacturing hours and average weekly unemployment claims
(inverted), although the gain in the latter was minimal. The 12-month moving
average for the average manufacturing hours component increased to 42.02 from 41.99
in July with August 2015 average manufacturing hours at 42.4, more than the 42.0
hours in August 2014. The monthly value was over an hour higher than the monthly
historical average for August (1996-2014) and the 12-month moving average remained
at or above 41.9 hours for the fourteenth straight month. The strength in
manufacturing hours persists, despite several prospective layoff announcements
at major manufacturers. With the monthly
gain, the 12-month moving average equaled its value six months ago, bringing up
the six-month diffusion index as noted above.
The 12-month moving average of weekly
unemployment insurance claims decreased by just one in August. Average monthly
claims were down 0.8 percent from last August, and 5.8 percent below the
monthly historical average (1987-2014). The
Bureau of Labor Statistics reported that the Iowa unemployment rate (a
coincident indicator) dropped to 3.7 percent in August, below the 4.3 percent
reported in August 2014.
There were six negative contributors
to the ILII in August with the agricultural futures profits index (AFPI) as the
largest negative contributor for the seventh month in a row. The impact of the
small gain in expected corn profits, with new crop futures prices up 2.6 percent
over last August, was not enough to offset the losses in the other commodities.
Although expected profits for corn have increased the last two months, the
levels remain at lows last seen in the summer of 2010. The other three
commodities experienced further contractions in expected profits with soybean new
crop futures prices 12.9 percent lower than last August. Although breakevens
for hogs have been falling for the last six months, the 31.1 percent
year-over-year drop in near futures contract hog prices for August pushed down
the 12-month moving average of expected
profits for hogs to 20.0 cents per pound, a level not seen since October 2013. Cattle
near futures prices fell 3.9 percent compared to last year, the second consecutive
month of price drops. Cattle production costs are 20.5 percent higher than they
were in August 2014, lowering expected cattle profits for the eighth month in a
row.
The Iowa stock market index was the
second largest negative contributor to the ILII. With only 7 of the 35 stocks
included in the Iowa stock market index experiencing positive gains, including only
3 of the 12 financial-sector company stocks, losses experienced by Wells Fargo,
DuPont, Monsanto, Deere and Company, ConAgra, Rockwell Collins, Meredith, and
Winnebago highlighted the widespread drop in the market. The stock market
volatility that was seen in August has been described by economists as a
correction event. A correction is a reverse movement of at least 10 percent in
the value of a stock or index to adjust for an overvaluation. Corrections are
generally temporary price declines interrupting an uptrend in the market. A
correction has a shorter duration than a bear market or a recession, but it can
be a precursor to either.
The other negative contributors were the
yield spread, diesel fuel consumption, new residential building permits, and the
new orders index. In August, the yield spread contracted with the long-term
interest rate decreasing 15 basis points and the short-term interest rate increasing
4 basis points from July. The short-term interest rate has been held near zero
by the Federal Reserve since December 2008, although expectations of a pending
increase in the Federal Funds rate likely explain the slight rise in August.
The decrease in the long-term interest rate suggests concern about the long-run
economic strength of the national economy.
Taxable diesel gallons were 59.7
million gallons in August 2015, below the 61.7 million gallons in August 2014. Diesel
fuel consumption experienced its fifth month of negative contributions to the
ILII which could reflect the lingering impact of the avian flu epidemic on
truck traffic related to the egg and poultry industry or weakness in the
durable goods manufacturing sector. After the 12-month moving average of diesel
fuel consumption registered a record of 59.70 million gallons in March, the five
months of year-over-year drops have pushed the 12-month moving average down to
58.81 million gallons.
The 12-month moving average of
residential building permits decreased to 868 in August. August 2015 permits
were down 7.1 percent from August 2014 and down 16.4 percent from the
historical average for August (1998-2014). Permits for buildings with two units
fell from 48 permits in August 2014 to 6 permits in August 2015 and permits for
buildings with three or four units decreased from 116 permits in August 2014 to
only 3 permits in August 2015 showing a stark drop in building plans for
multi-family structures. Although single-family permits increased slightly in
August, the small gains were not enough to offset the other declines.
The 12-month moving average for the
new orders index, which measures future manufacturing demand, dropped to 51.6,
the lowest since January 2010, with the August monthly value of 55.1 falling
short of the 57.8 value seen one year ago. However, August did reflect a
rebound in the monthly value above 50.0 after dipping into contraction
territory during July. Dr. Goss of Creighton University’s Heider College of Business,
who compiles the new orders index, reported the strength of the dollar has hindered
exports which have weighed on the state’s durable goods sector in terms of
jobs. His survey results have pointed to positive but weak gains for Iowa’s
overall economy for the rest of 2015. The new orders index has been a negative
contributor to the ILII every month since December 2013.
The monthly Iowa Leading Indicators
Index report is available on the Department's website.
Please contact Victoria L. Daniels at (515) 281-8450 or
Victoria.Daniels@iowa.gov if you have any questions about the
report.
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