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Inflationary Pressures in Mid-America Region Rise; Outlook for Short-Term Growth Strong

Inflationary Pressures in Mid-America Region Rise; Outlook for Short-Term Growth Strong

The Business Conditions Index for the Mid-America region points to brisk second quarter growth, but with potentially higher inflationary pressures, according to the monthly survey of supply managers and business leaders in the nine-state region.

The overall index for March climbed to 63.6, its highest level since November 2004 and up from February’s 59.9.

“The region is rebounding from the slower fourth quarter 2005 growth. However, this upturn is contributing to somewhat higher inflationary pressure,” Creighton University Economics Professor Ernie Goss said today.

The prices-paid index for March rose for the first time since September 2005 to 78.6 from February’s 74.3. “ In January I placed the likelihood of a Federal Reserve rate hike in May at less than 10 percent. I now set the probability of at least a 25 basis point, or quarter percent, increase at 90 percent when the Fed meets again on May 10,” said Goss.

The regional employment index climbed to 58.5 from February’s 58.4. As in February, employment growth was stronger in non-durable goods manufacturing with durable goods producers reporting light new hiring and service firms detailing little to no March net hiring. Since we began the survey in 1994, the region has added jobs at an average annual of 1.4 percent. The region is currently increasing employment at a slightly higher 1.5 percent rate. Goss said he expects the region to add jobs at an even faster pace for the second quarter before higher interest rates and downturns in farm income push job growth down significantly in the second half of 2006.

Despite the strong employment reading, business confidence declined in March to 60.4 from 64.6. The confidence index gauges the economic outlook of survey participants for the next six months. An index below 50.0 indicates a negative outlook. “The fifteen Fed rate hikes and higher energy prices, even with the warmer than expected winter weather, are having negative impacts on confidence among regional supply managers and business leaders," said Goss, the Jack A. MacAllister Chair in Regional Economics and director of the Creighton Economic Forecasting Group.

A solid upturn in new export orders to 56.6 followed February’s much softer reading of 52.0. Imports advanced to 60.4, its highest level since June of last year, and up from February’s 57.3. Higher commodity prices have kept the import reading at levels that point to no relief in the record trade deficits at least for the near term.

Other factors pushing the overall index higher for March were: new orders at 68.5, up from 61.0, production at 69.9, up from February’s 62.0, and inventories at 56.9, up slightly from 56.0. “The March delivery lead time index stood at a relatively high 54.5, unchanged from February. A delivery lead time index above 50.0 indicates potential shipping and delivery delays and can normally points to upward pressures on prices in the near term.”

“I expect higher commodity prices and escalating short term interest rates to push regional growth down significantly in the second half of 2006. For example, prices for farm inputs such as anhydrous ammonia, the most commonly used nitrogen fertilizer have soared as natural gas prices, a key input, have skyrocketed over the past several years. I expect the downward pressures on farm income to ripple throughout the region beginning in the second half of 2006,” said Goss.

The Creighton Economic Forecasting Group has conducted the monthly survey of supply managers in nine states since 1994 to produce leading economic indicators of the Mid-America economy. States included in the survey are Arkansas, Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, Oklahoma and South Dakota.

The Institute for Supply Management, formerly the Purchasing Management Association, began to formally survey its membership in 1931 to gauge business conditions. The Creighton Economic Forecasting Group uses the same methodology as the national survey.

The overall index, referred to as the Business Conditions Index, ranges between 0 and 100. An index greater than 50 indicates an expansionary economy over the course of the next three to six months.

Arkansas: The Arkansas economy is picking up steam according to the latest survey of supply managers and business leaders in the state. The overall index, a leading economic indicator, rose to 71.0 from February’s healthy 69.9. Components of the overall index for the month were: new orders at 70.6, production at 73.5, delivery lead time at 67.6, inventories at 71.9 and employment at 70.6. “Strong growth among firms in business and professional services and truck transport offset somewhat weaker reports from manufacturers for March,” said Goss. Average yearly job growth-last 12 months = 1.3 percent; since the survey began in 1994 = 1.4 percent.

Iowa: Growth in the Iowa economy over the next six months should be solid, according to the survey of supply managers and business leaders. The overall index, a leading economic indicator, stood at a strong 58.0, but down from February’s 61.5. Components of the overall index for March were: 67.9 for new orders, 62.1 for production, 46.2 for delivery lead time, 48.3 for employment and 55.8 for inventories. “Manufacturers, both durable and non-durable, reported strong economic conditions for March with growth in jobs and new orders. On the other hand, firms in Iowa’s information industry experienced downturns in employment for March. Farm income growth over the past several years continues to strengthen the state’s agriculture and mining machinery manufacturing. Furthermore, businesses detailed continuing growth in new construction even with higher short term and long term interest rates,” said Goss. Average yearly job growth-last 12 months = 1.8 percent; since the survey began in 1994 = 1.2 percent.

Kansas: For the first time since October, the business conditions index from the survey of supply managers and business leaders in Kansas advanced. The index, a leading economic indicator, increased to 51.9 from February’s 50.2. Components of the index for March were: new orders at 46.9, production at 59.4, delivery lead time at 40.6, employment at 62.5 and inventories at 43.8. “Durable goods producers reported much stronger economic conditions than non-durable goods manufacturers. Aircraft manufacturers and aerospace parts producers reported upturns for the month. As in past months, Kansas food processors detailed weaker business conditions,” said Goss. Average yearly job growth-last 12 months = 1.4 percent; since the survey began in 1994 = 1.3 percent.

Minnesota: For the fourth straight month, Minnesota’s business conditions index increased. The index climbed to 60.9 from February’s robust 59.6. Components of the overall index for March were: new orders at 63.6, production at 67.0, delivery lead time at 52.7, inventories at 57.3 and employment at 57.3. “Manufacturers across Minnesota reported stronger business conditions for the month. Even food processors who have experienced slow growth in the past experienced upturns for March. On the other hand, telecommunications firms described downturns in business activity,” said Goss. Average yearly job growth-last 12 months = 1.3 percent; since the survey began in 1994 = 1.6 percent.

Missouri: For the third consecutive month, Missouri’s business conditions index from the monthly survey of supply managers and business leaders increased. The index strengthened to 57.0 from February’s 56.2 and January’s 55.5. Components of the overall index from the March survey were: new orders at 58.7, production at 59.5, delivery lead time at 55.5, inventories at 57.2 and employment at 52.3. “Except for manufacturing firms in transportation equipment and scientific instruments, firms Missouri's large durable goods sector reported solid business activity for the month with increases in March hiring. Additionally, business and professional services firms, especially computer system design companies, outlined improving economic conditions over the past several months,” said Goss. Average yearly job growth-last 12 months = 1.1percent; since the survey began in 1994 = 1.4 percent.

Nebraska: Nebraska’s business conditions index soared to its highest level since July of last year. The index, a leading economic indicator, advanced to 63.5 from February’s strong 59.8. March readings for components of the overall index were: 69.6 for new orders, 69.1for production, 55.4 for delivery lead time, 47.3 for inventories and 61.6 for employment. “Despite the announced closure of two food processing plants, Nebraska’s manufacturing sector and overall economy are picking up steam. Additionally, transportation, both rail and truck, are benefiting from expanding local, regional and national economic conditions,” said Goss. Average yearly job growth-last 12 months = 1.4 percent; since the survey began in 1994 = 1.7 percent.

North Dakota: The business conditions index from the monthly survey of supply managers and business leaders in North Dakota rocketed to 69.9 from February’s 61.0. The index increased to its highest level since March of last year. Components of the overall index for March were: new orders at 76.5, production at 73.5, delivery lead time at 67.6, employment at 58.8 and inventories at 66.7. “Several sectors of North Dakota’s economy are benefiting from higher commodity prices. Despite higher fuel prices, North Dakota truckers continue to benefit from expansions in shipping stemming from improving economic conditions in the state, region and nation,” said Goss. Average yearly job growth-last 12 months = 1.8 percent; since the survey began in 1994 = 1.6 percent.

Oklahoma: Oklahoma’s business conditions index from the monthly survey of supply managers and business leaders, rose briskly for March. The index, a leading economic indicator, increased to 60.0 from February’s solid 55.9. Component readings for March were: new orders at 61.1, production at 66.7, delivery lead time at 44.4, inventories at 72.2 and employment at 55.6. “Despite cutbacks in transportation equipment manufacturing, air transportation companies and telecommunications, the Oklahoma economy is expanding at a brisk pace according to our monthly survey. Consistent with our survey, government data show that Oklahoma’s unemployment rate has now dipped to its lowest level since the middle of the U.S. recession in 2001,” said Goss. Average yearly job growth-last 12 months = 2.6 percent; since the survey began in 1994 = 1.6 percent.

South Dakota: The Business Conditions Index for South Dakota from the monthly survey of supply managers and business leaders declined to a still healthy 67.4 from February’s 69.9. Components from the March index were: new orders at 67.5, production at 70.0, delivery lead time at 57.5, inventories at 60.5 and employment at 75.0. “All sectors of the South Dakota economy reported improvements in business activity for the month. Even the state’s embattled food processing industry experienced solid upturns in March economic conditions,” said Goss. Average yearly job growth-last 12 months = 2.1percent; since the survey began in 1994 = 1.7 percent.

For historical data and forecasts visit www.outlook-economic.com or www.erniegoss.com.

For ongoing commentary on recent economic developments, visit the blog at www.economictrends.blogspot.com.

Posted 4/3/06