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Mid-America Job Growth Weakest Since May 2003 as Economy Slows with Reduced Inflationary Pressures for November

Survey results at a glance:

• Business Conditions Index declines for the fifth time in seven months
• Inflation gauge drops for fourth straight month
• November employment index declines to its lowest level since May 2003
• New export orders are up as imports decline

Mid-America Job Growth Weakest Since May 2003 as Economy Slows with Reduced Inflationary Pressures for November

Inflationary pressures and economic growth in the Mid-America region continue to slow, according to the November Business Conditions Survey of supply managers and business leaders in the nine-state region.

The overall Business Conditions Index, a leading economic indicator, declined to 54.1 from October’s 55.1 and September’s 57.0. Consistent with slower economic growth, inflationary pressures cooled as well. The prices-paid index, which tracks the cost of raw materials and supplies, dropped for the fourth straight month to 69.4, down from 73.1 in October and September’s 75.2.

“Despite the optimistic report from the Fed’s Beige Book this week, I expect growth to continue to slow well into 2007. While Federal Reserve Chairman Bernanke voiced concern this week that inflationary pressures are still lurking, I think the likelihood of a rate hike at its next meeting on Dec. 12 is less than 5 percent. Anemic growth will once again, in my judgment, force the Fed to reduce short-term rates, just like it did in 2000 when the Fed raised rates to only reduce them seven months later just before the beginning of the recession. However I don’t expect the Fed to move the rates lower until the second quarter of 2007 at the earliest,” Creighton University Economics Professor Ernie Goss said today.

Survey participants also reported weaker hiring for the region. The November employment index slumped for the sixth straight month to 50.5, its lowest level since May 2003, and down from October’s 54.2 and September’s 56.5. Goss said it is very likely that government-reported employment growth for the region will dip into negative territory as early as December 2006.

“November survey results were much weaker for the heavy manufacturing sector in the region. October’s durable goods orders from the Census Bureau report were not good. Our survey indicates that the national durable goods orders for the November report will also be weak when it is released on Dec. 22,” said Goss, director of Creighton’s Economic Forecasting Group and the Jack A. MacAllister Chair in Regional Economics. “Our regional survey, the national Institute for Supply Management survey, and low long-term interest rates are all sending the same message; the economy is very likely to slow significantly below the goals of the Fed in the months ahead.

Looking ahead six months, supply managers’ economic optimism deteriorated as the confidence index slipped to 50.5 from October’s 55.8.

“Elevated energy prices and a downturn in the housing sector are putting a slight crimp in the holiday shopping season. Comparing this year’s survey results with previous years indicates an upturn in Christmas buying over last year, however, the increase will be modest by historical standards,” said Goss.

Other components of November’s overall index were new orders at 57.3, up from October’s 55.6; production at 54.5; down from 55.7; inventories down to 50.0 from 56.3; and delivery lead time at 54.4, up from 53.3.

Trade indices plummeted for November as the new export orders index moved to 50.0 from October’s 54.9. November’s import index declined to 50.7, its lowest level in more than three years. “Declining oil prices helped push the import index lower. At the same time, weakness in durable goods orders from some of our chief trading partners pulled the export number lower,” 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: For the seventh consecutive month, Arkansas’ Business Conditions Index declined. The index, a leading economic indicator from a survey of supply managers and business leaders, moved to 41.5 from October’s 52.2. This is the lowest reading for Arkansas in four years and is another clear signal that the state’s economy will continue to slow in the months ahead. Components of the overall index for November were new orders at 40.0, production at 35.0, delivery lead time at 45.0, inventories at 70.0 and employment at 35.0. “U.S. Bureau of Labor Statistics data show that Arkansas lost jobs in September and October. Our survey indicates that the job losses are very likely to continue well into the first quarter of 2007,” said Goss. Gaining industry: trucking. Waning industry: food processing.

Iowa: Iowa’s Business Conditions Index from the November survey of supply managers and business leaders slumped to 42.0 from October’s 51.8 and September’s 55.7. November’s reading was the lowest recorded since February 2001, one month before the beginning of the recession. Components of the overall index for November were 33.3 for new orders, 38.0 for production, 45.7 for delivery lead time, 52.0 for employment and 52.2 for inventories. “One Iowa heavy-manufacturing supply manager reported that, ‘despite fears from the midterm election, the train has not jumped the tracks.’ A greater concern among supply managers and business leaders is the number of hikes the Feds took on the prime and its impact on growth. There is little doubt that growth in the Iowa economy is slowing. However, I will have to see another weak number from the December survey before I am comfortable projecting a downturn in Iowa’s economy. Manufacturing is clearly slowing from the lofty levels recorded earlier in the year. Agricultural machinery and manufacturing continue to benefit from high grain prices,” said Goss. Gaining industry: agricultural- machine manufacturing. Waning industry: computer and electronic manufacturing.

Kansas: While the Kansas Business Conditions Index was the second highest in the region, it did decline in November to 59.4 from October’s 65.0, but it was still up from September’s 58.6. Components of the November overall index were new orders at 54.2, production at 54.4, delivery lead time at 66.7, employment at 62.5, and inventories at 70.8. “U.S. government data that tracks the Kansas economy have been downright dismal for much of 2006. Our survey points to an upturn from some fairly weak levels. The good news, it is an improvement. The bad news is that it is coming off some earlier weak reports,” said Goss. Gaining industry: transportation equipment manufacturing. Waning industry: trucking.

Minnesota: For the first time since August, Minnesota’s Business Conditions Index was down. The index, a leading economic indicator from a survey of supply managers in the state, slumped to 55.5 from October’s 58.1 and September’s 57.2. Components of the overall index for November were new orders at 58.3, production at 56.5, delivery lead time at 58.3, inventories at 49.0 and employment at 51.0. “Supply managers reported that delays in shipments from U.S. manufacturers were forcing them to increasingly turn to foreign suppliers. Consistent with these delays were reports of higher-price pressures. One Minnesota heavy-manufacturing supply manager reported that the escalation in raw material prices in stainless steel, nickel and other metal products was becoming a problem.” Gaining industry: durable goods manufacturing. Waning industry: nondurable goods manufacturing.

Missouri: The state’s leading economic indicator for November points to growth into the second quarter of 2007. The Business Conditions Index rose to a healthy 59.1 from October’s 57.7 and September’s 58.0. Components of the overall index from the November survey were new orders at 64.1, production at 65.4, delivery lead time at 47.6, inventories at 41.4 and employment at 56.1. “Michael King, a Missouri supply manager, reported that the food industry continues to experience solid growth while Gordon Gosh, another Missouri supply manager reported that Christmas shopping this year appears to be stimulating the overall economy in Missouri,” said Goss. Gaining industry: food processing. Waning industry: vehicle manufacturing.

Nebraska: Nebraska’s Business Conditions Index for November expanded to a regional high of 63.1, its highest level since June, from October’s healthy 59.6. Components of the overall index for November were 69.0 for new orders, 67.2 for production, 53.4 for delivery lead time, 48.3 for inventories and 63.8 for employment. “Despite very strong readings related to ethanol production in rural areas of the state, supply managers in metropolitan areas in technology-related industries detailed weaker economic conditions for November,” said Goss. Gaining industry: rail transportation. Waning industry: telecommunications.

North Dakota: For the first time since March of this year, North Dakota’s Business Conditions Index expanded. The index advanced to 56.4 from October’s 53.0 and September’s 54.5. Components of the overall index for November were new orders at 66.7, production at 55.6, delivery lead time at 72.2, employment at 38.9 and inventories also at 38.9. “Dwight Barth, a North Dakota supply manager, reported that expanding economic conditions were causing supply bottlenecks, labor shortages and raw material outages. Surveys over the past several months indicate that North Dakota’s economy is expanding. However even with the growth in the overall index for November, I am troubled by the very weak employment reading for the month. It is too early to determine if this is due to labor shortages or early indications of problems in the economic pipeline,” said Goss. Gaining industry: nondurable-goods manufacturing. Waning industry: durable-goods manufacturing.

Oklahoma: Oklahoma’s Business Conditions Index from a monthly survey of supply managers and business leaders progressed to a healthy 58.8 from October’s 53.2 and September’s 52.8. Components of the overall index for November were new orders at 75.0, production at 62.5, delivery lead time at 50.0, inventories at 56.3 and employment at 37.5. “Oklahoma’s economy, due to a higher share of energy-related companies, tends to move opposite to that of the rest of the region and even the nation. We saw this in November as the regional index declined while Oklahoma’s rose. Despite the upturn in November, the very weak employment index is troubling and, I hope, not an early warning of labor issues in the months ahead,” said Goss. Gaining industry: food processing. Waning industry: Vehicle and vehicle-parts manufacturing.

South Dakota: The November Business Conditions Index for South Dakota grew slightly to a still weak 46.9 but was almost unchanged from October’s 46.8 and down from September’s stronger 52.5. Components of the November index were new orders and production at 41.2, delivery lead time at 55.9, inventories at 64.7 and employment at 47.1. “Drought conditions in some parts of the state more than offset the gains from higher grain prices, pushing overall economic activity lower for the month. South Dakota’s growth will slow well into the first quarter of 2007 according to our survey,” said Goss. Gaining industry: food processing. Waning industry: computer and electronic manufacturing.

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: 12/01/06