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Inflationary Pressures Wane in Mid-America Region as Economic Conditions Improve

The overall business conditions index for the Mid-America region, a leading economic indicator, was up for January while inflationary pressures declined, according to the monthly survey supply managers and business leaders in the nine-state region.

The overall index for January rose to a healthy 59.8, up from December’s solid 56.1.

“The overall index trended downward during the last quarter of 2005. January’s upturn is not surprising given the much warmer weather most states have experienced for the month. This has meant less spending on heating by both consumers and businesses supporting higher growth in non-energy related industries. However, oil prices, once again approaching $70 per barrel, and higher interest rates will moderate growth, especially in the second half of the year,” Creighton University Economics Professor Ernie Goss said today.

The prices-paid index, which measures inflation at the wholesale level, declined in January for the fourth consecutive month to 75.6 from 79.1 in December. It was the lowest reading since August, just before Hurricane Katrina struck the Gulf Coast region.

"I expect inflationary pressures to continue to weaken over the next few months despite higher oil prices, as the Fed’s 14 rate hikes since June 2004 begin to have their intended effect of slowing inflation and growth in the economy. While the overall index rose, confidence among supply managers and business leaders in the region declined to 59.7 for January from December's more optimistic 61.9. It may be that the closing of the Japanese border to U.S. beef again in January reduced the economic outlook among survey participants,” said Goss.

"As we have seen in the past few months, our inflation gauge, and most national inflation indicators, point to somewhat lower inflationary pressures ahead. Despite this trend, the Federal Reserve Open Market Committee (FOMC) raised interest rates at its meeting yesterday. While this was expected, I was surprised by the FOMC’s accompanying statement, which pointed to another rate hike at their next meeting on March 28. The most recent rate increases, and a rate hike at its next meeting, in my judgment, will slow growth to an unacceptably low rate for the region and the nation," said Goss, the Jack A. MacAllister Chair in Regional Economics and director of the Creighton Economic Forecasting Group.

The region’s employment index moved upward to 54.2 from December's 53.5. “For most states in the region, unemployment rates moved lower and job growth higher as manufacturers, finance firms, and energy providers detailed growth. However, telecommunications remained weak and construction cooled in January,” said Goss.

Significant increases in imports to 58.0 and new export orders to 57.2 indicate that the supply disruptions at Gulf ports from the fall hurricanes are behind us according to Goss. Other positive readings from the January report included new orders at 63.5, and production at 64.0.

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 third consecutive month, Arkansas’ business conditions index rose. The index, a leading economic indicator from a survey of supply managers and business leaders, climbed to 71.7 from December’s 70.9. Components of the overall index for the month were: new orders at 79.2, production at 79.4, delivery lead time at 70.8, inventories at 50.0 and employment at 62.5. “Arkansas’ unemployment rate has now moved to its lowest level since before the last recession. Furthermore, U.S. Bureau of Labor Statistics job data show that the employment level in Arkansas rose to a record level in December. Our survey points to continuing job growth into the second quarter of this year,” said Goss.

Iowa: The overall index from the monthly survey of supply managers and business leaders in Iowa changed little from December’s reading. The index declined from December’s robust 58.6 to a still strong 58.0. Components of the overall index for January were: 58.3 for new orders, 65.8 for production, 41.2 for delivery lead time, 63.2 for employment and 52.9 for inventories. “After moving lower in the second half of 2005, our survey results for the last two months point to improving growth into the second quarter of 2006. Durable goods manufacturing, especially agriculture machinery producers, detailed strong growth for the month, while non-durable goods firms reported weaker economic conditions for January,” said Goss.

Kansas: For the third straight month, the business conditions index from the survey of supply managers and business leaders receded. The index, a leading economic indicator, moved to 52.8 from December’s 53.5. Components of January’s business conditions index were: new orders at 60.7, production at 60.9, delivery lead time at 46.4, inventories at 39.3 and employment at 64.3. “The Kansas economy began the year on a somewhat softer note than the rest of the region. However, firms reported solid job growth for January with durable goods producers detailing much stronger conditions than non-durable goods firms in the state,” said Goss.

Minnesota: Minnesota’s business conditions index rose to its highest level since September of 2005, increasing to 58.0 from December’s healthy 55.4. Components of the overall index for January were: new orders at 57.7, production at 60.0, delivery lead time at 59.6, inventories at 58.2 and employment at 54.8. “Minnesota began the year on a stronger note with firms adding workers for the month according to our report. Growth was solid for energy firms and computer and electronic manufacturers in the state, but remained weak for telecommunications businesses,” said Goss.

Missouri: For the first time since August, the state’s business conditions index from the monthly survey of supply managers and business leaders in the state increased, albeit slight. The index, a leading economic indicator, climbed to 55.5 from December’s 54.8. Components of the overall index from the January survey were: new orders at 61.2, production at 61.4, delivery lead time at 46.6, inventories at 50.0 and employment at 49.2. “Job growth in Missouri has definitely slowed over the past several months. In terms of hiring, Missouri experienced January job losses. However, strong new orders should convert to an improving employment picture in the months ahead. Durable goods producers were much more bullish in their economic assessments for January than non-durable goods manufacturers,” said Goss.

Nebraska: For the first time since September of 2005, the overall index from the monthly survey of supply managers and business leaders in Nebraska strengthened, climbing to 55.7 from December’s solid 55.4. January readings for components of the overall index were: 59.3 for new orders, 54.8 for production, 53.3 for delivery lead time, 55.8 for inventories and 53.6 for employment. “While firms reported overall growth in hiring for January, it is clear that for Nebraska, employment growth has slowed from rates achieved for this same period last year. Both durable and non-durable goods producers reported soft January economic conditions,” said Goss.

North Dakota: The overall index from the January survey of North Dakota supply managers and business leaders increased for the first time since October of last year. The index for January inched higher to 54.2 from December’s 53.6. Components of the overall index for January were: new orders at 55.9, production at 50.0, delivery lead time at 73.5, employment at 41.2, and inventories at 56.7. “Our survey and government data show that compared to this time last year, the North Dakota economy has cooled significantly. In fact the state’s unemployment rate is higher today than it was one year ago. Weaker conditions were reported by non-durable goods producers, while durable goods manufacturers detailed upturns in January economic activity,” said Goss.

Oklahoma: Oklahoma’s business conditions index from the monthly survey of supply managers and business leaders in the state soared to its highest level since May of 2004. The index moved to 66.5 from December’s healthy 59.5. Component readings for January were: new orders at 70.0, production at 90.0, delivery lead time at 40.0, inventories at 50.0 and employment at 60.0. “Despite higher interest rates, firms increased their level of construction activity for January. Durable goods manufacturers, except for motor vehicle manufacturers reported solid growth for the month. Despite the announced GM pullback in the state, the January confidence index stood at a strong 80.0,” said Goss.

South Dakota: The overall index from the monthly survey of South Dakota supply managers and business leaders advanced for January after two straight drops in the monthly index. The leading economic indicator advanced to 66.5 from December’s strong 58.6. Components from the January index were: new orders at 73.3, production at 76.7, delivery lead time at 46.7, inventories at 56.7, and employment at 63.3. “South Dakota firms have reported significant improvements in the economic conditions for the month of January. Good January weather pushed construction activity higher. At the same time, strong demand for manufactured goods abroad pushed manufacturing higher for the month,” 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 2/1/06