Survey results at a glance:
- Business Conditions Index down but pointing to soft landing
- Job growth solid for August but down from July
- Confidence weakens and continues to fall
- New export orders decline to three-year low
AUGUST SURVEY POINTS TO ‘SOFT LANDING’ FOR MID-AMERICA ECONOMY
Growth in the Mid-America region shows signs of cooling as inflationary pressures begin to diminish, according to a monthly survey of supply managers and business leaders in a nine-state region.
The overall Business Conditions Index slumped to its lowest level of the year but stood at a solid 56.3, down from July’s 60.2 and well above growth neutral 50.0.
“Over the past several months, this leading economic indicator has been pointing to slower but positive growth for the rest of 2006, as higher short-term-interest rates and energy prices restrain growth to a level consistent with Federal Reserve growth targets,” Creighton University Economics Professor Ernie Goss said today.
The prices-paid index, which measures inflation at the wholesale level still indicates inflationary pressures at 80.2, but is down from July’s 82.2. “We are seeing more and more signals in our survey that the Fed rate hikes may be bringing the economy in for a ‘soft landing.’
“The government employment report, that will be released later today, will be a very important indication of the likely interest-rate action by the Federal Reserve Open Market Committee (FOMC) at its next meeting on Sept. 20. Based on our survey and national surveys, I expect the Fed will again forego an interest-rate increase. At this time, I place the likelihood of a September rate hike at 20 percent. However, if the U.S. economy added more than 225,000 jobs in August, I would raise the chances of a rate increase to 50-50,” said Goss, the Jack A. MacAllister Chair in Regional Economics and director of the Creighton Economic Forecasting Group.
The Mid-America August employment reading stood at a healthy 57.0 but down from July’s 58.5.
“August’s employment reading is consistent with an annualized employment growth of 1.7 percent. This level of job growth is still healthy, but down from May’s high employment index of 65.5 that was consistent with an annualized employment growth of 3.1 percent,” said Goss.
Since May of 2004, businesses have endured 17 Federal Reserve rate increases and an increase in the price of a barrel of oil from $40 to $70. “This has had understandably negative impacts on confidence among survey participants. The August confidence index dropped to 47.4, its lowest level since shortly after Hurricane Katrina and well below July’s 52.1,” said Goss.
Minnesota Supply Manger Dan Feder said, “Rising energy and health care costs are hurting business growth and the economic outlook.”
Other components of August’s overall index were: new orders at 53.1, down from July’s 61.6; production at 59.9, down from 65.2; inventories at 63.1, up from 54.4; and delivery lead time at 51.3, down from 55.2.
Trade numbers from the August survey were also less promising. New export orders slumped to 49.9, its lowest level since October 2003 and significantly lower than July’s 54.2. At the same time, imports rose from July’s 55.6 to 57.0.
“These numbers are certainly not encouraging and will tend to slow growth in the months ahead as imports continue to outpace exports. I expect the U.S. trade imbalance to encourage more destructive legislative initiatives by the Congress as we enter the election season,” 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 fourth consecutive month, the Arkansas Business Conditions Index moved lower. However the index, a leading economic indicator, continues to point to positive, but slower, growth for the rest of 2006. August’s reading of 58.8 was below July’s 66.7 and June’s 71.4. Components of the overall index for August were new orders at 48.4, production at 56.5, delivery lead time at 43.1, inventories at 58.6, and employment at 60.0. “Arkansas’ unemployment rate has risen by 1.1 percent since January. This was the largest increase among the nine states. Non-durable manufacturers continue to report soft business activity. Based on our survey, I expect the state’s unemployment rate to rise only slightly in the months ahead, as current strong construction activity wanes,” said Goss.
Iowa: According to the August survey of supply managers and business leaders in Iowa, the brisk pace of growth has slowed and will continue to decelerate in the months ahead. Iowa’s overall index slumped to a solid 53.0, down from July’s 58.0 and June’s robust 65.9. Components of the overall index for August were new orders at 48.4, production at 56.5, delivery lead time at 43.1, employment at 60.0 and inventories at 58.6. “Iowa’s unemployment rate has declined by 0.3 percent since January. Based on surveys over the past several months, I expect the rate to move back to January’s level in the months ahead. Significant August growth was reported by durable and nondurable manufacturers, and insurance carriers. On the other hand, the fast growing truck shipping industry detailed pullbacks from July levels,” said Goss.
Kansas: For the first time since February of this year, the Business Conditions Index for Kansas declined. The index dropped to 68.2, still a regional high but off of July’s 73.5. Components of the August overall index were new orders at 71.4, production at 78.6, delivery lead time at 56.7, employment at 60.0, and inventories at 66.7. “The durable-goods sector in Kansas reported strong growth for August, even while other sectors detailed weaker business conditions. The unemployment rate has risen by 0.3 percent since January of this year. Based on our survey, I expect the state’s jobless rate to move lower for the remainder of 2006,” said Goss.
Minnesota: For a third straight month, Minnesota’s Business Conditions Index declined to 56.5 compared to July’s 60.3 and June’s 69.4. Components of the overall index for August were new orders at 58.1, production at 57.3, delivery lead time at 52.3, inventories at 64.0 and employment at 52.3. “Inflation concerns remain an issue for Minnesota supply managers like Joe Kamerud who says he remains concerned about raw-material-price pressures. Minnesota automobile manufacturers and their suppliers are reporting declining economic fortunes, and one supply manager expected Ford’s announced reduction in SUV/truck production to ‘cause a glut of problems’ that would spillover into the rest of the economy. Minnesota’s unemployment rate has dropped by 0.3 percent since the beginning of the year. Based on our survey, I expect it to rise to last January’s levels before the end of the year,” said Goss.
Missouri: Missouri’s Business Conditions Index expanded for a second consecutive month to 57.2 from July’s 56.4 and June’s 52.5. Components of the overall index from the August survey were new orders at 59.8, production at 66.3, delivery lead time at 46.2, inventories at 50.0 and employment at 53.8. “Missouri’s unemployment rate is the same as in January. Our survey results indicate that the rate should rise slightly in the months ahead. As supply manger Chris Childers said, ‘Most smaller home builders have corrected out of their extra inventory and are back to business as usual.’ However, the state’s construction industry, both commercial and residential, was weak for August. This and pullbacks among durable- goods manufacturers will restrain growth to negligible levels for the rest of 2006,” said Goss.
Nebraska: For the first time since April, Nebraska’s Business Conditions Index advanced. The index expanded to 61.6 from July’s 60.3, pointing to healthy business growth for the second half of 2006. However, surveys over the past several months indicate that this growth will be down from growth experienced earlier in 2006. Components of the overall index for August were 60.7 for new orders, 65.1 for production, 55.8 for delivery lead time, 54.7 for inventories and 66.3 for employment. “Growth among shippers and durable-goods manufacturers bolstered growth for August,” said Goss.
North Dakota: For the fifth 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, decreased to 54.5 from July’s 57.0 and June’s 62.7. Components of the overall index for August were new orders at 40.9, production at 50.0, delivery lead time at 86.4, employment at 59.1 and inventories at 50.0. “While growth is down, it remains positive and above the growth trend. However, due to concerns that a spillover of drought conditions will have significant impacts on businesses in the state, the confidence index declined to a regional low of 40.9. Growth continued for North Dakota’s natural resources and mining industry,” said Goss.
Oklahoma: The leading economic indicator from a monthly survey of supply managers and business leaders in Oklahoma advanced to its highest level since May of this year. The August reading of 64.6 was up from July’s to 57.0 and June’s 54.3. Components of the overall index for August were new orders at 57.1, production at 71.4, delivery lead time at 64.3, inventories at 85.7 and employment at 57.1. “The August survey for Oklahoma was obviously a good one. Contrary to earlier in the year, firms in the state’s large natural resources and mining industry reported only tepid growth for August. Durable goods producers, except for firms connected to motor-vehicle manufacturing, detailed strong gains for the month,” said Goss.
South Dakota: South Dakota’s Business Conditions Index plunged to its lowest level in three years to 58.3, well above growth neutral but down from July’s 65.9 and June’s 65.0. Components of the August index were new orders at 53.8, production at 65.4, delivery lead time at 53.8, inventories at 61.5 and employment at 57.7. “Over the last three months, South Dakota’s unemployment rate has risen by 0.3 percent. I expect this rate to increase slightly in the months ahead as current solid construction activity slows. Durable-goods manufacturers, including computer and electronic producers, reported level activity from July levels,” said Goss.
For ongoing commentary on recent economic developments, visit the blog at www.economictrends.blogspot.com.