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Economy Simmers as Mother Nature Heats Up Inflation

Survey results at a glance:

  • Business Conditions Index up for first time since April
  • High energy prices and weather wilt business confidence
  • July job growth healthy but not as strong as June’s
  • Economic soft landing looks more likely

ECONOMY SIMMERS AS MOTHER NATURE HEATS UP INFLATION
The leading economic indicator for the Mid-America region advanced for July, while inflationary pressures intensified, according to a monthly survey of supply managers and business leaders in a nine-state region.

The overall business conditions index improved to 60.2, from June’s 57.9, representing the first increase since April of this year.

“We are seeing the first signs that the Fed rate hikes may be bringing the economy in for a soft landing. However, our July prices-paid index at 82.2, along with comments from survey participants, point to real concerns regarding inflationary pressures at the wholesale level,” Creighton University Economics Professor Ernie Goss said today.

“I expect the Fed to forego a rate increase at its Aug. 8 meeting but that will depend heavily on the U.S. Bureau of Labor Statistics’ employment report to be released this Friday. If the economy added more than 200,000 jobs in July, I expect a rate hike of 25 basis points (.25 percent). Anything below 125,000 will cause the Fed to leave the funds rate at its current 5.25 percent, its highest level since February 2001,” said Goss, the Jack A. MacAllister Chair in Regional Economics and director of the Creighton Economic Forecasting Group.

Supply managers and business leaders in the region noted that fuel prices are causing a drag on the economy, with many reporting added fuel charges for supplies and raw-material deliveries. Higher fuel prices aren’t the only energy woe. Hot weather in the nine-state region and across the country means electricity costs are rising as many businesses struggle to stay cool in this unusually hot summer.

Other weather-related factors included a power outage in the St. Louis area. Gordon Gosh, vice president of the National Association of Purchasing Management-St. Louis, said, “The severe windstorm that struck the St. Louis area in July shutting down several businesses for four or five days was a major economic hit. The loss of wages, food products and sales was costly.”

Despite weather-related weakness, the employment index stood at a solid 58.5, although down from June’s robust 60.2. The region has added 121,000 jobs in the first half of 2006. This represents a 1.9 percent annual job growth, and well above the post-1992 average of 1.5 percent.

“It is clear from our survey that this rate of job growth will not continue for the rest of 2006. While I do not expect recessionary economic conditions, I do anticipate growth well below its current rate,” said Goss.

Trade numbers for July softened as new export orders declined to 54.2 from June’s 54.7, and imports slumped to 55.6 from June’s 57.5. Other readings for July included new orders at 61.6, production at 65.2, delivery lead time at 55.2 and inventories at 54.4.

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: According to the July survey of supply managers and business leaders, the brisk pace of the Arkansas economy is slowing. The overall index declined for the third straight time to 66.7 from June’s 71.4 and May’s 76.2. Components of the overall index for the month were new orders at 66.7, production at 69.4, delivery lead time at 63.9, inventories at 63.9 and employment at 66.7. “Arkansas food processors that we survey have been reporting for some time that economic conditions were not good in this industry. Tyson Foods, with recently announced weak profits and job cuts for the state, confirmed this industry pullback. Despite weak conditions in food processing and high fuel costs, truck shippers in Arkansas continue to report ever increasing economic activity. Second-half growth for Arkansas will be good but not outstanding,” said Goss.

Iowa: Iowa’s overall index, a leading economic indicator from a survey of supply managers and business leaders, declined to a solid 58.0 from June’s 65.9 and May’s 65.7. Components of the overall index for July were: 59.6 for new orders, 61.5 for production, 47.9 for delivery lead time, 59.6 for employment and 56.3 for inventories. As evidence of Iowa’s expanding economy, the U.S. Department of Labor’s reported initial claims for unemployment insurance declined by 3,341 for the latest reporting period. “Iowa’s manufacturing sector has been an important contributor to improving jobs prospects and has been one of strongest in the region for 2006. However, the announced cutbacks by Whirlpool, when they occur, will certainly cool that growth in the second half of 2006. Machinery production related to construction and agriculture has been particularly strong in recent months. The state’s information industry has experienced little growth over the past several months,” said Goss.

Kansas: For the fifth straight month, the Business Conditions Index for Kansas expanded. The index, a leading economic indicator, rose to 73.5 from June’s 65.1 and May’s strong 62.5. Components of the July overall index were new orders at 86.1, production at 83.3, delivery lead time at 52.3, employment at 55.8 and inventories at 60.5. One Kansas durable-goods manufacturer reported that fuel prices are going to begin affecting prices of other commodities, which will be a drag on the economy. “Contrary to the rest of the region, Kansas truck-transportation companies have been reporting weak economic activities over the past several months,” said Goss.

Minnesota: For a second consecutive month, Minnesota’s Business Conditions Index moved lower. However, July’s robust reading of 60.3 points to continuing growth for the state well into the final quarter of this year. The index, a leading economic indicator from a survey of supply managers and business leaders in the state, declined from June’s 69.4 and May’s record 74.8. Components of the overall index for July were new orders at 66.3, production at 61.6, delivery lead time at 52.3, inventories at 60.5 and employment at 55.8. Price increases for raw materials and supplies remains a problem in the state. As reported by Minnesota supply manager, Orick Otterness of Ritrama, “Costs continue to rise and cost cutting is at a point that little can be done. Consolidation of suppliers is moving at a very fast pace. This will push the prices up even more in the near future.” According to Goss, despite the price pressures at the commodity level, Minnesota’s durable goods manufacturers, even technology related, enjoyed solid economic activity for July.

Missouri: Missouri’s Business Conditions Index advanced from June’s regional low of 52.5. The index, a leading economic indicator from the monthly survey of supply managers and business leaders, expanded to 56.4. Components of the overall index from the July survey were new orders at 57.9, production at 63.4, delivery lead time at 50.8, inventories at 52.7 and employment at 51.7. Growth in Missouri’s health-services industry has been brisk, as indicated by Michael Roth of Magellan Health. He wrote that he was, “Almost too busy to answer this survey due to increasing demand on purchasing for new products and services and potential new customers may add 30 percent to revenue. Closing on a second new acquisition this year will increase company capabilities in new areas.” However, according to Goss, the severe storms that hit St. Louis in July had significant and negative impacts on many of the other businesses that he surveyed. Manufacturing in Missouri has been and will continue to be weaker than for the rest of the region.

Nebraska: For the third straight month, Nebraska’s Business Conditions Index moved lower. The index weakened to 60.3 from June’s 63.3 and May’s 64.0. The index, a leading economic indicator from a monthly survey of supply managers and business leaders in the state, points to solid but somewhat weaker growth for the second half of 2006. Components of the overall index for July were 67.9 for new orders, 65.4 for production, 57.4 for delivery lead time, 52.8 for inventories and 62.0 for employment. Commodity prices in July posed a problem for many Nebraska businesses. Mike Grote of Nebraska’s Store Kraft, said his company “continues to be hurt by rising prices of steel, and wood and fuel surcharges. We have tried to offset with new suppliers but the problem continues to grow across the board with not just the steel and wood but sub-component parts that are made of the same.” Goss said that on the plus side, higher prices have yet to slow manufacturing activity in Nebraska and fuel surcharges have bolstered truck transportation firms.

North Dakota: For the fourth consecutive month, North Dakota’s Business Conditions Index slumped. The index, a leading economic indicator from the monthly survey of supply managers and business leaders, declined to 57.0 from June’s 62.7 and May’s 63.3. Components of the overall index for July were new orders at 54.5, production at 54.3, delivery lead time at 77.3, employment at 54.5 and inventories at 45.0. Energy prices remain a problem for some businesses in the state. As noted by Wes Vettel, a supply manager in North Dakota’s heavy manufacturing sector, “Deliveries are taking longer as prices escalate on chemicals, welding gases and steel and are up some on remaining commodities.” Goss said the higher prices have yet to slow economic activity for durable goods producers and the higher level of activity has aided truck-transportation firms in North Dakota.

Oklahoma: The state’s leading economic indicator from a monthly survey of supply managers and business leaders rose to 57.0 from June’s 54.3, but down from May’s 75.8. Components of the overall index for July were new orders at 50.10, production at 60.0, delivery lead time at 60.1, inventories at 80.0 and employment at 50.0. “Oklahoma’s information industry, including publishing and telecommunications, continues to report weak economic activity. On the other hand, durable goods producers remain on a positive growth path with new construction activity in July. As is typical, Oklahoma supply managers are optimistic when other supply managers in the region are more pessimistic. Oklahoma’s business confidence index for July was the second highest in the region at 65.0,” said Goss.

South Dakota: For a second consecutive month, South Dakota’s Business Conditions Index increased. The index, a leading economic indicator from a monthly survey of supply managers and business leaders, rose to 65.9 from June’s 65.0 and May’s 60.4. Components of the July index were new orders at 68.8, production at 71.9, delivery lead time at 59.4, inventories at 59.4 and employment at 62.5. “Durable goods manufacturers, even technology related, reported solid economic activity and hiring for July. Among nondurable goods producers, food processing had good economic numbers for July,” said Goss.

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 8/1/06