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Slower Growth For 2006: Higher Interest Rates Will Offset the Opening of International Markets to U.S. Beef

Slower Growth For 2006: Higher Interest Rates Will Offset the Opening of International Markets to U.S. Beef

Higher interest rates continue to rein in growth for the nine-state Mid-America region. The overall business conditions index for the region, a leading economic indicator, was down for December, marking the fourth straight month that the reading from the survey of supply managers and business leaders in the region declined.

The overall index for December weakened to 56.1, its lowest level since December 2003, and down from November’s 56.9.

“The Mid-America regional economy began 2005 like a lion, but higher interest rates and elevated energy costs forced the region’s economy to end the year like a lamb. The region added 109,000 jobs, an annual growth rate of 1.7 percent, in the first half of 2005, but added only 42,000 jobs, an annual growth rate of 0.7 percent, in the second half of the year. I do expect the opening of Asian markets to the importation of U.S. beef to have positive impacts on job growth in 2006 for food processors and their suppliers in the region," Creighton University Economics Professor Ernie Goss said today.

Despite the weaker job market in the second half of 2005, the regional confidence index climbed to 61.9, its highest level since July 2005, a month before Hurricane Katrina. The confidence index gauges survey participants’ economic outlook six months out. An index below 50.0 indicates a negative outlook. "However, economic weakness among U.S. automakers will have significant and negative impacts on portions of the region for 2006,” said Goss.

For the third consecutive month, the prices-paid index for the region declined moving to 79.1 from November’s 82.7. While December’s reading still indicates significant inflationary pressures at the commodity and wholesale level, Goss said he expects inflationary pressures to weaken in the months ahead as moderating oil prices and higher interest rates move through the economic pipeline.

"While our inflation gauge and most national inflation indicators point to somewhat lower inflationary pressures ahead, I expect the Federal Reserve Open Market Committee (FOMC) to raise interest rates at its next meeting on January 31. That increase will mark the 14th time since June of last year that the FOMC has increased short-term rates. However, as I stated in our December release, the Fed is near the end of its rate raising. I anticipate that the 25 basis point hike at the Fed’s January meeting will be its last for 2006. Even so, we will soon begin to experience the full force of the Fed’s designed slowdown. The economic deceleration should move the Fed to the sidelines for the first year of the Bernanke Fed," said Goss, the Jack A. MacAllister Chair in Regional Economics and director of the Creighton Economic Forecasting Group.

The region’s employment index stood at a tepid 53.5 for December, but up from November’s 52.1. “Our survey is pointing to weaker job growth for 2006 than was experienced in 2005. In 2005, the region added jobs at a solid 1.4 percent to 1.5 percent pace. I expect the rate of job growth to remain around 1.0 percent for the first half of 2006,” said Goss.

New export orders deteriorated for the month to 50.7 from November’s 53.3. According to Goss, in 2006 a weakening U.S. dollar, making American goods cheaper abroad, and the opening of the Asian beef markets, will push exports higher for most states in the region. Imports declined to their lowest level since September of 2003 with a reading of 52.4.

Other readings from the December survey were: new orders at 58.3, no change from November, production at 58.4, down from 62.0, delivery lead time at 53.0, down from 55.4, and inventories at 53.2, up from 51.5.

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. T

he 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: Arkansas’ business conditions index, a leading economic indicator based on a survey of supply managers, rose sharply to 70.9 from November’s 61.9 and October’s 55.2. Components of the overall index for the month were: new orders at 75.0, production at 71.4, delivery lead time at 75.1, inventories at 64.3 and employment at 64.3. “Manufacturing job losses in the second half of 2005 pushed Arkansas' overall job growth for the fourth quarter to zero. However, Arkansas firms such as Tyson Foods, benefiting from the opening of the Japanese and other Asian beef markets, and J.B. Hunts Transport, profiting from the U.S. economic expansion, will drive Arkansas job growth higher in the first half of 2006,” said Goss. Job growth in 2005: 12,400 (1.1 percent); job growth for first half of 2006: 7,500 (1.3 percent-annualized).

Iowa: Iowa’s business conditions index from the monthly survey of supply managers and business leaders climbed to 58.6 from November’s tepid 52.1 and October’s weak 47.2. Components of the overall index for December were: 58.3 for new orders, 62.5 for production, 43.2 for delivery lead time, 63.0 for employment and 63.6 for inventories. “Iowa’s leisure & hospitality industry and manufacturing, both durable and non-durable, ended 2005 on a very strong economic note. On the other hand, Iowa's transportation sector and construction industry are beginning 2006 on a lackluster path. The outcome of the Whirlpool purchase of Maytag will be an important economic event for Newton and surrounding communities for 2006 and beyond,” said Goss. Job growth in 2005: 25,500 (1.6 percent); job growth for first half of 2006: 13,500 (1.8 percent-annualized).

Kansas: For the second consecutive month, the business conditions index for Kansas declined. The December index dropped to 53.5 from November’s 57.1 and October’s 66.0. Components of December’s overall index were: new orders at 45.0, production at 55.0, delivery lead time at 55.0, inventories at 50.0 and employment at 65.0. “The construction industry and transportation sector in Kansas have pushed 2005 growth into the very strong range. However, higher interest rates will slow growth for both industries in the first half of 2006. The rate at which our Asian trading partners open their borders to U.S. beef will be an important factor affecting growth for the state in 2006,” said Goss. Job growth in 2005: 28,000 (2.1 percent); job growth for first half of 2006: 12,000 (1.8 percent-annualized).

Minnesota: Minnesota’s monthly business conditions index climbed slightly for December. The index, a leading economic indicator from a survey of supply managers and business leaders, rose to 55.4 from November’s solid 55.2. Components of the overall index for December were: new orders at 57.9, production at 59.8, delivery lead time at 53.5, inventories at 51.8 and employment at 49.1. “For 2006, Minnesota’s big economic stories will be problems related to the continuing cutbacks in the U.S. auto industry, a turnaround for the telecommunications industry, and finally a weakening of Minnesota's construction industry. Minnesota’s home price growth was tops in the region for 2005. I do not expect to see a repeat for 2006. We are already detecting some impacts of a slowing housing and construction sector. Nonetheless, our survey points to still solid growth for the first half of 2006,” said Goss. Job growth in 2005: 32,000 (1.2 percent); job growth in first half of 2006: 16,000 (1.2 percent-annualized).

Missouri: The state’s business conditions index from the monthly survey of supply managers and business leaders declined from November’s solid reading. Missouri's index, a leading economic indicator, declined to 54.8 from November’s robust 58.3. Components of the overall index from the December survey were: new orders at 56.9, production at 60.3, delivery lead time at 50.0, inventories at 48.1 and employment at 51.7. “Despite difficulties for Missouri's vehicle manufacturing sector, durable goods manufacturers overall continue to report expanding economic conditions. I expect the state’s telecommunications industry to experience much improved growth for 2006. On the other hand, due to increasing and stiff competition from casinos in other states, I anticipate a subdued 2006 for Missouri’s casinos,” said Goss. Job growth in 2005: 13,500 (0.8 percent); job growth for first half of 2006: 6,000 (0.5 percent-annualized).

Nebraska: For the fourth time in the past five months, the overall index from the monthly survey of supply managers and business leaders in Nebraska softened. The index dropped to 55.4 from November’s 58.6 and October’s 59.2. Components of the overall index for the month were: 63.0 for new orders, 65.0 for production, 51.0 for delivery lead time, 58.0 for inventories and 52.9 for employment. “No other state in the nation stands to derive as much of an economic stimulus from the opening of the Asian beef market as Nebraska. However, economic gains are going to be slow going as food processing firms attempt to reestablish a beef presence in these foreign markets. Nonetheless, 2006 is certainly going to be a better year than 2005 for Nebraska's food processors. Slower economic conditions for truck transporters will partially offset the continuing robust growth in professional and business services,” said Goss. Job growth in 2005: 15,500 (1.8 percent); Job growth for first half of 2006: 6,000 (1.3 percent-annualized).

North Dakota: For the second straight month, North Dakota’s business conditions index declined. The overall index from the December survey of North Dakota supply managers and business leaders stood at 53.6, down from November’s 57.9. Components of the overall index for December were: new orders at 63.3, production at 66.7, delivery lead time at 73.3, employment at 50.0 and inventories at 46.2. “After growing at a very strong pace in 2005, we are now detecting a slowdown in the pace of growth. Just as non-durable goods manufacturers reported improving economic conditions, durable goods producers detailed a pullback in economic conditions for the month. I expect this slower pace of growth to continue into 2006,” said Goss. Job growth in 2005: 8,500 (2.5 percent); Job growth for first half of 2006: 3,000 (1.7 percent-annualized).

Oklahoma: Oklahoma’s business conditions index from the monthly survey of supply managers and business leaders in the state rose to a robust 59.5 from November’s 54.5 and October’s 52.1. Component readings for December were: new orders at 58.3, production at 58.2, delivery lead time at 33.3, inventories at 33.6 and employment at 58.6. “Transportation firms reported continuing economic weakness. While 2006 is likely to be a positive year for the Oklahoma economy due to an improving telecommunications sector and expansions in business service firms, the closing of GM operations in Oklahoma City will produce some fairly negative economic consequences. Not only will direct vehicle manufacturing jobs be lost, but the 6,000 plus vehicle parts manufacturing jobs will be in jeopardy in the second half of 2006,” said Goss. Job growth in 2005: 23,000 (1.5 percent); job growth for first half of 2006: 14,000 (1.9 percent-annualized).

South Dakota: The overall index from the monthly survey of South Dakota supply managers and business leaders deteriorated to a still strong 58.6 from November’s 68.6. Components from the December index were: new orders at 88.2, production at 87.5, delivery lead time at 50.0, inventories at 61.8 and employment at 73.5. “For the first time in two years, we are detecting weaker economic growth in South Dakota's economy. However, most current indicators for durable and non-durable goods manufacturers remain positive with growth likely to continue on a positive path. The growth for 2006 will be lower than that for 2005,” said Goss. Job growth in 2005: 7,000 (1.6 percent); job growth for first half of 2006: 3,000 (1.5 percent-annualized).

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 1/3/06