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Inflation Still a Threat as Mid-America Economic Growth Slows

Survey results at a glance:

  • Business Conditions Index suffers largest one-month slump since 1999.
  • Confidence declines to lowest level since November 2005.
  • Employment growth drops from May’s strong numbers.

INFLATION STILL A THREAT AS MID-AMERICA ECONOMIC GROWTH SLOWS
The Mid-America Business Conditions Index took its largest one-month tumble in more than six years in June with inflationary pressures showing few signs of weakening, according to the monthly survey of supply managers and business leaders in the nine-state region.

While the overall index remained above growth neutral 50.0, it plummeted to 57.9, its lowest level since December of 2005, and down from May’s 65.7.

“The 17 Federal Reserve rate hikes over the past two years and higher energy prices are beginning to slow the regional economy. While I do expect the region to continue to expand for 2006, it is clear that second-half growth will be significantly less than was experienced in the first six months,” Creighton University Economics Professor Ernie Goss said today.

Inflationary pressures continue for the region despite the downturn in the overall index.

“While the prices-paid index declined slightly to 81.9, it still indicates significant inflationary pressure at the wholesale level. All eyes will be on the Fed when it meets again in August. At this point in time, I expect the Fed to cease raising rates as forthcoming data confirm a slowing economy. However, it will depend on the Fed’s interpretation of the economic data released between now and Aug. 8,” said Goss, the Jack A. MacAllister Chair in Regional Economics and director of the Creighton Economic Forecasting Group.

The regional employment index declined to 60.2 from May’s record 65.5. “The nine-state region has added 103,000 jobs, or an annualized growth rate of 1.6 percent. Based on our survey, I expect the region to add 61,500 jobs in the second half of 2006, or an annualized growth rate of 1.0 percent. Growth in the regional labor market will begin to deteriorate by the end of the third quarter of this year,” said Goss.

Rising interest rates and high energy prices cut into supply managers economic outlook six months from now. The confidence index declined to 57.3, its lowest level since November 2005, after post-Katrina hurricane concerns pushed the economic outlook lower.

Firms in the region registered solid trade numbers for the month with new export orders at 54.7, but the number was still down from May’s 61.5. Imports likewise declined to 57.5 from May’s 65.8. “Food-processing firms continue to report weak economic conditions. However, the opening of the Japanese market to U.S. beef, if the embargo is truly lifted, will be very positive and significant for the region. Unfortunately, this issue has and will continue to be more political than economic,” said Goss.

Factors contributing to June’s decline in the overall index were new orders at 57.8, down from 67.6; production at 57.3, down from 69.9; and delivery lead time at 54.8, down from May’s 59.4. On the other hand, inventory levels grew as the index increased to 59.7 from May’s 58.7.

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 June survey of supply managers and business leaders, the Arkansas economy continues to grow at a brisk but slowing pace. The overall index declined to 71.4 from May’s 76.2 and April’s 78.6. Components of the overall index for the month were new orders at 75.0, production at 75.1, delivery lead time at 67.5, inventories at 60.0 and employment at 70.0. “Food processors in Arkansas experienced slow to no growth in June. On the other hand, truck transportation firms reported strong growth for the month, despite higher fuel costs,” said Goss. Jobs added 2006: First half, 7,200 (1.2 percent annualized); projected second half, 3,000 (0.6 percent annualized).

Iowa: Iowa’s overall index, a leading economic indicator from a survey of supply managers and business leaders, advanced slightly to a robust 65.9, from May’s 65.7 and April’s 59.6. Components of the overall index for June were 70.0 for new orders, 70.1 for production, 60.9 for delivery lead time, 60.0 for employment and 63.0 for inventories. “Supply managers buying steel noted that surcharges on their purchases continue hurting profits. With Iowa accounting for a large share of the nation’s ethanol production, construction of new facilities and expansions by existing facilities in this industry are having positive impacts on the Iowa economy,” said Goss. Jobs added 2006: First half, 10,800 (1.4 percent annualized); projected second half, 6,000 (0.8 percent annualized).

Kansas: For the fourth straight month, the Business Conditions Index for Kansas advanced. The index, a leading economic indicator, rose to 65.1 from May’s strong 62.5 and April’s 62.0. Components of June’s overall index were new orders at 72.2, production at 69.4, delivery lead time at 44.4, employment at 66.7 and inventories at 61.1. “As noted by one Kansas non-durable goods supply manager, there are significant cost increases for raw materials such as steel, aluminum and stainless steel. Telecommunication firms continue to report weak results while heavy manufacturers detailed solid growth for the month,” said Goss. Jobs added 2006: First half, 7,100 (1.1 percent annualized); projected second half, 7,000 (1.1 percent annualized).

Minnesota: For the first time since November of 2005, Minnesota’s Business Conditions Index moved lower. The index declined to 69.4 from May’s record 74.8. Components of the overall index for June were: new orders at 72.9, production at 77.1, delivery lead time at 54.2, inventories at 62.5 and employment at 69.2. “Minnesota non-durable-goods-supply managers reported that the second quarter ended on a very strong note. Despite higher energy prices, truck transportation firms continue to report rising shipments, even with added surcharges. Minnesota manufacturers are driving much of this growth,” said Goss. Jobs added 2006: First half, 31,000 (2.3 percent annualized); projected second half, 20,000 (1.5 percent annualized).

Missouri: Missouri’s Business Conditions Index dropped for the first time since December of 2005. The index, a leading economic indicator from the monthly survey of supply managers and business leaders, slumped to 52.5 from May’s 59.0 and April’s 57.2. Components of the overall index from the June survey were new orders at 52.3, production at 52.1, delivery lead time at 53.1, inventories at 52.4 and employment at 52.7. “Missouri supply manager Chris Childers reported that ‘commodity prices have begun to show signs of weakness, with the exception of metals.’ Both durable and non-durable goods manufacturers reported softer conditions for June. Transportation-equipment manufacturing remains a weak industry in Missouri,” said Goss. Jobs added 2006: First half, 16,500 (1.2 percent annualized); projected second half, 8,000 (0.6 percent annualized).

Nebraska: For the second straight month, Nebraska’s Business Conditions Index declined. The index weakened to a still solid 63.3 from May’s 64.0 and April’s 65.9. Components of the overall index for June were 69.5 for new orders, 63.2 for production, 56.7 for delivery lead time, 58.5 for inventories and 61.7 for employment. “As one Nebraska manufacturing supply manager noted, concerns with rising fuel prices could slow manufacturing down with ever increasing fuel surcharges hurting profits. These negative impacts will likely mount over the next several months. The opening of the Japanese beef market, if the embargo truly ends, will have important and positive impacts on the Nebraska economy. However, even if the Japanese market is fully opened, Nebraska beef exports to this country will not be restored to 2003 levels this year or the next,” said Goss. Jobs added 2006: First half, 14,000 (3.0 percent annualized); projected second half, 8,000 (1.7 percent annualized).

North Dakota: For the third consecutive month, North Dakota’s Business Conditions Index declined. The index, a leading economic indicator from the monthly survey of supply managers and business leaders, was down at a still strong 62.7 from May’s 63.3 and April’s 67.7. Components of the overall index for June were new orders at 63.3, production at 66.7, delivery lead time at 66.6, employment at 60.0 and inventories at 50.0. “North Dakota supply manager Dwight Barth said, ‘Energy prices still continue to cause price escalations in all sectors of the supply chain.’ Durable goods manufacturers reported stronger conditions while non-durable producers detailed weaker economic activity,” said Goss. Jobs added 2006: First half, 2,200 (1.2 percent annualized); projected second half, 1,500 (0.8 percent annualized).

Oklahoma: Oklahoma’s Business Conditions Index from the monthly survey of supply managers and business leaders in the state, slumped for the second straight month. The index, a leading economic indicator, plummeted to 54.3 from May’s 75.8 and April’s 81.9. Component readings for June were new orders at 50.1, production at 56.3, delivery lead time at 54.5, inventories at 58.3 and employment at 57.5. One Oklahoma services supply manager noted that business continues at a brisk pace at a level about 9 percent above 2005 levels. “Durable and non-durable producers reported solid conditions for the month. Consistent with this activity, supply managers indicated an upturn in building activity even with higher interest rates,” said Goss. Jobs added 2006: First half, 7,800 (1.0 percent annualized); Projected Second half, 5,000 (0.7 percent annualized).

South Dakota: After three straight declines, 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 65.0 from May’s 60.4. Components of the June index were: new orders at 69.0, production at 71.4, delivery lead time at 61.9, inventories at 57.1 and employment at 57.1. “One South Dakota non-durable goods supply managers noted that employment levels are up, due to the hiring of temporary summer help to cover vacations and such. The South Dakota economy is coming off of a period of very strong growth. Even high tech firms are reporting solid conditions. I do expect this growth to moderate in the months ahead as higher interest rates slow economic activity,” said Goss. Jobs added 2006: First half, 6,700 (3.4 percent annualized); projected second half, 3,000 (1.8 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 7/3/06