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Rising Farm Income and Biofuels Production Push Overall Index Higher For Mid-America Region: Inflationary Pressures on the Rise Again

March survey results at a glance:

  • Business Conditions Index advances to its highest level since July 2006
  • Inflationary pressures rise for first time in seven months
  • Confidence tumbles amid rising oil prices

Rising Farm Income and Biofuels Production Push Overall Index Higher For Mid-America Region: Inflationary Pressures on the Rise Again

Inflationary pressures soared and economic growth advanced in the Mid-America region, according to the March Business Conditions survey of supply managers and business leaders in the nine-state region.

The overall Business Conditions Index rose for the third straight month to its highest level since July of last year. The index, a leading economic indicator, rose slightly to 58.9, from 58.4 in February and 57.6 in January. “Healthy farm income and booming ethanol production continue to be important sources of growth for the region,” Creighton University Economics Professor Ernie Goss said today.

However, after seven months of declines, inflationary pressures were up in March due in part to rising energy costs. The prices-paid index, which tracks the cost of raw materials and supplies, rose to 71.5, its highest level since October of last year, from 67.0 in February.

“Rising inflationary pressures will prevent the Federal Reserve Open Market Committee (FOMC) from reducing interest rates, even as the housing sector places a drag on the economy. I expect no change in interest rates at the FOMC’s next meeting May 9. The Fed is caught between the economic drag of the housing market and rising inflationary pressures and will continue to be more concerned with the inflationary upturn than the fallout from the housing sector,” said Goss.

New hiring for the region declined in March to 56.5 from February’s 58.6, but up from January’s 54.6. “Hiring, especially in non-urban areas of the region, remains strong and well above the national rate of growth. A significant number of survey respondents reported difficulty in finding and hiring skilled workers,” said Goss.

“The construction and expansion of ethanol plants, along with soaring ethanol production and very healthy farm income, have combined to produce a strong job market, especially for non-urban areas of the region,” said Goss, director of Creighton’s Economic Forecasting Group and the Jack A. MacAllister Chair in Regional Economics.

Looking ahead six months, supply managers’ economic optimism, captured by the confidence index, sank to 51.0 from February’s 56.1 and January’s much stronger 61.4. Higher energy and oil prices helped drive confidence index down for a second month. “Oil prices approaching $70 per barrel, the hostage situation in Iran, and continuing weakness in the housing sector, pushed the confidence index lower for March,” said Goss.

Trade numbers were mixed for March. New export orders rose slightly to 52.0 from 51.4 in February, and imports rose as well to 56.5 from 54.3. “U.S. trade policy will be one of the top economic issues for the Mid-America region and the nation for 2007. The anti-trade rhetoric emanating from Congress, if matched by trade restrictions, will be very damaging for the economy, especially the agriculture sector,” said Goss.

Other components of March’s Business Conditions Index, were new orders at 61.3 from February’s 60.2; production at 64.2, up from 60.5; inventories at 54.8, down from 57.0; and delivery lead time at 51.4, down from 52.6.

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: Arkansas’ Business Conditions Index declined from to a still brisk 64.0 from February’s 68.6 and January’s 51.0. Components of the overall index for March were new orders at 66.7, production at 62.5, delivery lead time at 66.7, inventories at 58.3 and employment at 62.5. “Government data indicate that the state’s unemployment rate has moved lower over the past two months. Our survey points to a continuing downward trend in Arkansas’ jobless rate. Supply managers report a stabilizing housing sector even as the durable goods manufacturing sector softens,” said Goss. Gaining industry: telecommunications, waning industry: transportation equipment manufacturing.

Iowa: For the third consecutive month, Iowa’s Business Conditions Index expanded. The leading economic indicator from a monthly survey of supply managers and business leaders advanced to a vigorous 65.3 from February’s 58.1. Components of the overall index for March were 72.5 for new orders, 77.5 for production, 47.4 for delivery lead time, 57.5 for employment and 55.3 for inventories. “The impact of excellent farm income continues to propel the economy in rural portions of the state which is spilling into urban areas. The direct and indirect gains from ethanol production remain significant and are having a positive impact on our survey results,” said Goss. Gaining industry: computer and electronic manufacturing, waning industry: food processing.

Kansas: The Kansas Business Conditions Index for March expanded to a healthy 55.3 from February’s regional low of 46.3. Components of the overall index were new orders at 53.2, production at 55.1, delivery lead time at 56.3, employment at 57.3 and inventories at 56.7. “Current business conditions are strong in the state. Our leading economic indicator points to solid growth in the months ahead, but with somewhat higher rates of unemployment stemming from weakness recorded in January and February of this year. Robust March business activity was recorded across most survey industries,” said Goss. Gaining industry: transportation equipment manufacturing, waning industry: telecommunications.

Minnesota: For a second consecutive month Minnesota’s Business Conditions Index advanced. The index grew to 56.3 from February’s 52.3 and January’s 50.5. Components of the overall index for March were new orders at 60.4, production at 57.4, delivery lead time at 53.7, inventories at 55.6, and employment at 50.9. “We have recorded an upward trend in Minnesota’s leading economic indicator even as the unemployment rate has risen. I expect an upturn in the state’s economy well into summer,” said Goss. Gaining industry: computer and electronic manufacturing, waning industry: telecommunications.

Missouri: For the first time since October of last year, Missouri’s Business Conditions Index declined. The index slumped to a still healthy 61.6 from February’s 64.7 and January’s 63.7. Components of the overall index from the March survey were new orders at 64.3, production at 66.7, delivery lead time at 48.9, inventories at 53.6 and employment at 64.8. “While the state’s economy and manufacturing sector continue to grow, firms with ties to vehicle manufacturing have yet to halt their downturn trend. Thus even as Missouri’s economy advances, I expect its unemployment rate to remain as much as a half percentage point above that of the nation,” said Goss. Gaining industry: computer software and systems design, waning industry: vehicle and parts manufacturing.

Nebraska: The Business Conditions Index for Nebraska was up for March. The index grew to a robust 60.0 from February’s 56.8 and January’s 56.6. Components of the overall index for March were 60.5 for new orders, 64.0 for production, 51.1 for delivery lead time, 54.5 for inventories and 63.6 for employment. “Rapidly expanding farm income and biofuels production have helped push the unemployment rate to its lowest level in more than five years. Our survey indicates that this growth will continue well into the summer. A bona fide opening of the Asian beef market would be a very important factor to support Nebraska’s growth,” said Goss. Gaining industry: rail and truck transportation, waning industry: food processing.

North Dakota: The state’s Business Conditions Index advanced to its highest level in two years. The leading economic indicator from a monthly survey of supply managers and business leaders expanded to 71.2 from February’s 65.5 and January’s regional high 68.1. Components of the overall index for March were new orders at 75.1, production at 75.0, delivery lead time at 55.0, employment at 75.3 and inventories at 66.7. “Very strong farm income along with expansions for energy related firms continue to fuel growth in North Dakota. As in past months, labor shortages for skilled labor were reported by companies,” said Goss. Gaining industry: truck transportation, waning industry: food processing. Oklahoma: Oklahoma’s Business Conditions Index declined to a still solid 55.5 from February’s 57.9, pointing to positive growth for the second quarter of 2007. Components of the overall index for March were new orders at new orders at 64.3, production at 53.4, delivery lead time at 46.2, inventories at 55.3 and employment at 52.2. “Oil services firms reported solid growth for the month. The expanding state economy has meant good times for Oklahoma’s trucking industry with shipping expanding at a solid pace,” said Goss. Gaining industry: Truck transportation, waning industry: telecommunications.

South Dakota: The Business Conditions Index for South Dakota declined to its lowest level since August 2002, but remained above growth neutral 50.0. The index, a leading economic indicator from a survey of supply managers and business leaders, slumped to 51.3 from February’s 54.6 and January’s 54.7. Components of the March overall index were new orders at 50.0, production at 52.9, delivery lead time at 50.0, inventories at 55.9 and employment at 50.0. “Soaring farm income, agriculture commodity prices, and ethanol production are pushing the economy ahead at a solid pace. However, according to our survey, this pace of growth will slow, but remain positive well into the summer months,” said Goss. Gaining industry: food processing, waning industry: computers and electronic manufacturing.

For historical data and forecasts visit our website at: http://www.creighton.edu/business/economicoutlook/

For ongoing commentary on recent economic developments, visit our blog at: www.economictrends.blogspot.com.