Survey results at a glance:
- Business Conditions Index declined to its lowest level in four years
- Inflation gauge drops for fifth straight month
- December hiring positive, but weak
- New export orders and imports rise for the month
Leading Economic Indicator Declines to Lowest Level in Four Years; Inflationary Pressures Cool as Well
Inflationary pressures and economic growth in the Mid-America region continued to slow, according to the December Business Conditions Survey of supply managers and business leaders in a nine-state region.
The overall Business Conditions Index, a leading economic indicator, declined to its lowest level since December 2002. The December index slumped to 53.8 from November’s 54.1 and October’s 55.1. At the same time, inflationary pressures cooled for the fifth straight month as the region’s inflation gauge moved to its lowest level since July 2005. The prices-paid index, which tracks the cost of raw materials and supplies, dropped to 68.3 from November’s 69.4 and October’s 73.1.
“Despite recent strength in government job reports which are coincident or current economic indicators, leading economic indicators, such as that produced by our survey, point to slowing economic growth with lower inflationary pressures for the first half of 2007. I expect this scenario to push the Federal Reserve to the sidelines with no interest rate changes until the second quarter of 2007. I do anticipate a rate cut in the second quarter,” Creighton University Economics Professor Ernie Goss said today.
Survey participants also reported positive but weak new hiring for the month. The December employment index climbed for the first time since May 2006 to 53.1 from November’s tepid 50.5. “Fourth quarter job growth in the region was about one-fourth of what it was in the first quarter of 2006. I expect this slow job growth to continue well into 2007,” said Goss.
December survey results, like November’s, were much weaker for durable goods manufacturers as the downturn in housing is spilling over into heavy manufacturing. At the same time, renewable energy production, including ethanol, and solid growth in value-added services kept the overall index in positive growth territory for December.
“I expect the key regional economic stories for 2007 to be agricultural commodity prices, the new farm bill, renewable energy production and beef and pork exports,” said Goss, director of Creighton’s Economic Forecasting Group and the Jack A. MacAllister Chair in Regional Economics.
Supply managers’ economic optimism six months out deteriorated as the confidence index slipped again to 47.3 from November’s 50.5 from October’s 55.8. “This is the lowest confidence index for the region since Hurricane Katrina pushed the outlook gauge to 45.5 in October 2005,” said Goss.
Other components of December’s overall index were new orders at 54.0, down from November’s 57.3, production at 52.7, down from 54.5, inventories up to 55.9 from 50.0, and delivery lead time 49.5, down from November’s 54.4.
New export orders improved slightly as the index advanced to 51.3 from 50.0 in November. December’s import index jumped to 57.9 from November’s 50.7. “The cheap U.S. dollar, which increases the price of imported goods and reduces the price of U.S. goods abroad, has failed to restrain imports or stimulate exports. The weakness in new export orders was focused in durable goods manufacturing,” 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: The Business Conditions Index for Arkansas plummeted to its lowest level since the recession in 2001. The index, a leading economic indicator from a survey of supply managers and business leaders, declined for the eighth consecutive month to 33.6 from November’s weak 41.5 and October’s tepid 52.2. Components of the overall index for December were new orders and production at 27.8, delivery lead time at 55.6, inventories at 55.8 and employment at 22.2. “Arkansas will end 2006 having lost 6,700, or 3.4 percent, of its manufacturing job base. Downturns in food processing and transportation equipment manufacturing will force overall job growth below zero in the state for the first quarter of 2007,” said Goss.
Iowa: For the fifth time in the past six months, Iowa’s Business Conditions Index moved lower. The leading economic indicator dropped to 40.4 from November’s 42.0 and October’s 51.8. Components of the overall index for December were 36.4 for new orders, 37.5 for production, 40.9 for delivery lead time, 45.8 for employment and 47.7 for inventories. “Iowa will end 2006 having gained over 4,000 manufacturing jobs for a 1.7 percent growth. Despite the national construction slowdown, Iowa building shows solid growth. Weakness was recorded in the state’s information sector and computer and electronic component manufacturing. Concerns were raised by supply managers like John Feeley, who said that the Fed applied ‘too much of a brake’ to the economy,” said Goss.
Kansas: The Business Conditions Index for Kansas slumped to its lowest level since April 2003. The leading economic indicator declined to 47.5 from November’s brisk 59.4. Components of the December overall index were new orders at 41.7, production at 37.5, delivery lead time at 54.2, employment at 58.3, and inventories at 58.2. “Kansas will end 2006 having gained less than 500 manufacturing jobs for a 0.1 percent percent growth. Strong growth in aerospace manufacturing is being offset by weakness in nondurable goods production and in the information sector, including telecommunications,” said Goss.
Minnesota: Minnesota’s Business Conditions Index declined to its lowest level since May 2005. The index, a leading economic indicator from a survey of supply managers, moved to 51.7 from November’s 55.5 and October’s 58.1. Components of the overall index for December were new orders at 52.0, production at 52.1, delivery lead time at 55.0, inventories at 52.0 and employment at 48.0. “Supply managers like Dan Feder reported a continuing trend in outsourcing which is playing a part in restraining job growth. Despite the outsourcing, Minnesota ended 2006 with approximately the same number of manufacturing jobs that it had at the beginning of the year. Food-processing ended the year with weak new orders and hiring,” said Goss.
Missouri: The Business Conditions Index for Missouri climbed to its highest level for the year. The index advanced to 62.6 for December from 59.1 for November. Components of the overall index from the December survey were new orders at 69.5, production at 66.3, delivery lead time at 50.0, inventories at 55.0 and employment at 60.7. “Despite the recent upturn, Missouri lost 7,000 manufacturing jobs, or approximately 2.3 percent of its base, in 2006. Vehicle manufacturing accounted for a significant portion of 2006’s manufacturing job losses. On the other hand, value added services, including software development, began and ended 2006 on a high note. Karen Huffman, a supply manager for a munitions producer, expects war related production to slow in 2007,” said Goss.
Nebraska: From November’s regional high, Nebraska’s Business Conditions Index moved lower for December. The index, a leading economic indicator from a survey of supply managers in the state, declined to 60.5 from November’s 63.1. Components of the overall index for December were 64.1 for new orders, 62.5 for production, 51.6 for delivery lead time, 51.6 for inventories and 64.1 for employment. “Nebraska gained fewer than 1,000 manufacturing jobs in 2006 for a 0.7 percent increase. Beef exports to Japan and South Korea have yet to get back on track. Growth in beef exports and ethanol production will be important economic issues for non-metropolitan Nebraska in 2007. Transportation continues to be an important growth sector for metropolitan Nebraska,” said Goss.
North Dakota: For the second straight month, North Dakota’s Business Conditions Index advanced to a regional high 66.3 from November’s healthy 56.4 and October’s 53.0. Components of the overall index for December were new orders and production at 75.0, delivery lead time at 70.0, employment at 45.0 and inventories at 55.0. “The good news is that North Dakota gained manufacturing jobs in 2006. The bad news is that the growth was less than 200 net jobs. Food production ended the year on a positive note while trucking slowed for the final quarter of 2006,” said Goss.
Oklahoma: Oklahoma’s Business Conditions Index slumped to a still healthy reading. of 54.8 from November’s 58.8, but was up from October’s 53.2 and September’s 52.8. Components of the overall index for December were new orders at 66.7, production at 61.1, delivery lead time at 37.5, inventories at 50.0 and employment at 44.4. “Despite losses in vehicle manufacturing and related jobs, Oklahoma added approximately 1,600 manufacturing jobs in 2006 for a growth of 1.1 percent in this sector. Auto related industries will continue to experience weakness for 2007 while the oil services industry will have a solid first half in 2007,” said Goss.
South Dakota: South Dakota’s Business Conditions Index grew slightly to a still weak 47.5. The index, a leading economic indicator from a survey of supply managers and business leaders in the state, was almost unchanged from November 46.9 and October’s 46.8 Components of the December index were new orders at 46.9, production at 40.6, delivery lead time at 53.1, inventories at 59.4 and employment at 46.9. “South Dakota’s manufacturing sector was the strongest in the region for 2006 adding 1,900 jobs for a growth rate of 4.6 percent. Food-processing ended the year on a strong note while computer and electronic component manufacturing rounded out 2006 on a weak note,” said Goss.
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