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Oil Prices Push Down Confidence for Mid-America Region as Growth Slows

July survey results at a glance:

• Inflation gauge declines for the third straight month.
• Business Conditions Index dips to lowest level in six months.
• Cheap dollar restrains import growth.
• High oil prices, downturns related to housing and stock market volatility lowered business confidence.

Oil Prices Push Down Confidence for Mid-America Region as Growth Slows

As inflationary pressures weakened for the third straight month, the overall index for the Mid-America region declined to its lowest level in six months, according to the July Business Conditions survey of supply managers and business leaders in the nine-state region.

The Business Conditions Index, a leading economic indicator, slumped to 57.8, its lowest level since January and down from June’s 60.0. “Data surveys over the past several months including July’s point to positive but slowing economic growth in the months ahead for the region, along with elevated inflationary pressures,” Creighton University Economics Professor Ernie Goss said today.

"Higher oil prices and negative impacts from the housing downturn in metropolitan areas of the region pushed the overall index down. On the positive side, economic expansions fueled by ethanol production have pushed growth higher for many industries, including trucking and rail shipping of ethanol production output and waste products," said Goss.

The prices-paid index, which tracks the cost of raw materials and supplies, declined for the third consecutive month to its lowest level since February of this year. However, the July index of 70.4, down from June’s 76.2, continues to indicate elevated inflationary pressures in the wholesale pipeline.

“Based on our survey and other government data, I place the likelihood of an interest-rate change at the next meeting of the Federal Reserve Open Market Committee (FOMC) on Aug. 7 at less than 5 percent,” said Goss.With rising food prices and oil prices approaching $80 per barrel, it is clear that inflationary pressures are too high for a rate cut, but slowing growth accompanying the downturn in the housing sector and mortgage defaults will prevent a rate hike.”

The higher prices and problems in the housing sector have had an impact on the economic optimism of supply managers in the region. The July confidence index, slumped to 53.3 from 55.7 in June.

The July employment index declined slightly to a still healthy 57.4 from 59.0 in June and 59.8 in May.

“I expect third-quarter job growth for the region to continue at a healthy pace exceeding that of the rest of the nation. While the slower housing sales, mortgage defaults and rising oil prices have restrained regional job growth, they have had an even bigger impact on national job growth,” said Goss, director of Creighton’s Economic Forecasting Group and the Jack A. MacAllister Chair in Regional Economics.

Trade numbers weakened for July. New export orders dropped to 56.8 from June’s healthy 60.0. Imports slumped as well to 57.0 from June’s 60.4 and May’s 62.1. “The weak dollar, especially against the Euro, making foreign goods more expensive in the U.S. and pushed import growth lower. At the same time, imports from Asia, along with high oil prices, have kept imports above growth neutral,” said Goss.

Other components of July’s Business Conditions Index were new orders at 58.9, down from June’s 63.7; production at 62.7, down from 64.0; inventories at 53.7, up from 52.9; and delivery lead time at 50.9, down from 51.9.

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.

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

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