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Healthy Export Orders and Declining Inflationary Pressures Accompany Strong Growth in Mid-America Region

May survey results at a glance:

• Business Conditions Index weakens but points to healthy growth in months ahead.
• Inflation gauge drops for first time since February.
• Export orders are healthy due to weak dollar.
• High gasoline prices contribute to weak confidence index.

Healthy Export Orders and Declining Inflationary Pressures Accompany Strong Growth in Mid-America Region

Inflationary pressures softened as the overall index for the Mid-America region declined, according to the May Business Conditions survey of supply managers and business leaders in the nine-state region.

The overall Business Conditions Index declined in May to 58.3 from April’s 62.0. “Higher gasoline and energy prices contributed to the downturn in the overall index. However, the index, a leading economic indicator, points to healthy growth in the months ahead for the region,” Creighton University Economics Professor Ernie Goss said today.

The prices-paid index, which tracks the cost of raw materials and supplies, declined for the first time since February of this year. The May reading of 78.9, though down from April’s 81.7, continues to indicate significant inflationary pressures at the wholesale level.

“Based on our survey and other government data, I do not expect the Federal Reserve to move on interest rates at its next meeting June 27-28. It is clear that inflationary pressures remain too high for a rate cut but economic weakness generated by the downturn in housing will prevent a rate hike,” said Goss.

Looking ahead six months, supply managers’ economic optimism, captured by the confidence index, fell to a weak 51.9 from April’s already anemic 53.9. Higher energy and gasoline prices helped restrain the confidence index for a third straight month. “Record gasoline prices, a weak housing sector and heightened international tensions took a toll on confidence in the region in May,” said Goss.

New hiring for the region expanded to 59.8 from April’s 58. “Labor shortages in non-urban areas of the region for skilled workers, such as welders, continues to restrain job growth as strong farm income and ethanol production in the region more than offset any weakness in the housing sector,” said Goss, director of Creighton’s Economic Forecasting Group and the Jack A. MacAllister Chair in Regional Economics.

Trade numbers remained strong for May. New export orders were down slightly at 59.3 from April’s 60.7, but still up significantly from March’s 52.0. Imports rose again for the month to 62.1 from April’s already strong 60.3. “The weak dollar is behind the strength in the new export orders, but high oil prices and Chinese imports are pushing the import index higher,” said Goss.

Other components of May’s Business Conditions Index were new orders at 59.8, down from April’s 66.3; production at 61.1, down from 68.2; inventories at 57.3, up from 54.4; and delivery lead time at 52.4, up from 52.2.

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 Arkansas Business Conditions Index declined to a still robust 60.3 from April’s 65.0 and March’s 64.0. The leading economic indicator suggests that business activity will be healthy for Arkansas well into the summer. Components of the overall index for May were new orders at 60.0, production at 65.0, delivery lead time at 50.0, inventories at 75.0, and employment at 55.0. “While the overall state economy continues to grow, Arkansas manufacturing, particularly food processing and transportation equipment production, has weakened for much of 2007. Our survey points to solid growth in the months ahead with the unemployment rate stabilizing at 5.0 percent. The second half of 2007 looks much better for food processors in the state,” said Goss.

Iowa: For the first time since December of last year, Iowa’s Business Conditions Index moved lower. The leading economic indicator from a monthly survey of supply managers and business leaders dipped to a still healthy 60.9, from April’s 66.1 and March’s 65.3. Components of the overall index for May were 64.7 for new orders, 64.5 for production, 53.1 for delivery lead time, 58.8 for employment, and 56.3 for inventories. “The expanding economic conditions in Iowa and the region have been very good for business activity for computer and electronic-component manufacturers and for trucking firms that have experienced solid growth with the growing economy. On the other hand, nondurable goods manufacturers, including food processors, report softer economic conditions,” said Goss.

Kansas: The Kansas Business Conditions Index for May dipped to 56.8, from 58.5 in April. The index, a leading economic index from a monthly survey of supply managers in the state, points to healthy but somewhat slower growth in the months ahead. Components of the overall index for May were new orders at 61.3, production at 58.3, delivery lead time at 49.3, employment at 56.4, and inventories at 51.2. “The large aeronautics manufacturing sector in Kansas continues to expand at a rapid pace. This, combined with improving economic conditions in the state’s telecommunications sector, will contribute to an expanding state economy in the months ahead,” said Goss.

Minnesota: The Business Conditions Index for Minnesota expanded to its highest level since July of last year. The index grew to 58.9, from April’s 55.8 and March’s 56.3. Components of the overall index for May were new orders at 61.6, production at 69.0, delivery lead time at 51.2, inventories at 50.0, and employment at 52.3. “The downturn in the housing sector is having a larger negative impact in Minnesota than in other Mid-America states. Slower growth was also recorded in telecommunications and truck transportation. On the other hand, food processing in Minnesota was solid for May,” said Goss.

Missouri: The Missouri Business Conditions Index expanded for a second straight month, advancing to 66.2, from 62.5 in April and 61.6 in March. Components of the overall index from the May survey were new orders at 72.9, production at 75.7, delivery lead time at 40.5, inventories at 66.7, and employment at 63.5. “Despite weakness in Missouri’s large durable goods manufacturing sector, especially auto and auto-related production and furniture production, the state’s economy continues to improve. Our survey points to solid growth in the months ahead with the unemployment rate stabilizing slightly above its current low of 4.5 percent,” said Goss.

Nebraska: For the first time since February, Nebraska’s Business Conditions Index dipped. The index, a leading economic indicator from a survey of survey of supply managers and business leaders in the state, decreased to 59.2, from April’s 62.2 and March’s 60.0. Components of the overall index for May were 60.4 for new orders, 58.7 for production, 60.0 for delivery lead time, 50.0 for inventories, and 62.0 for employment. “Regional growth has been very good for the state’s large rail and truck transporters. Our survey is tracking this growth even as survey participants report shortages of workers in skilled occupations such as welders. Food processors in Nebraska detailed pullbacks as demand for beef in Asia has yet to live up to expectations,” said Goss.

North Dakota: The Business Conditions Index for North Dakota inched down slightly to a still regional high reading of 74.4, from April’s 75.6 and March’s 71.2. Components of the overall index for May were new orders at 77.8, production at 77.7, delivery lead time at 66.7, employment at 83.3, and inventories at 50.0. “North Dakota’s durable-goods manufacturers continue to report strong economic activity. On the other hand, food processors, which account for over sixty percent of the state’s nondurable-goods manufacturers, reported slower business activity for the month. Trucking firms in North Dakota benefited from the state’s economic expansion,” said Goss.

Oklahoma: For a second straight month, Oklahoma’s Business Conditions Index stood at a regional low. The index from a monthly survey of supply managers in the state declined to 53.3, from April’s 54.2. Components of the overall index for May were new orders at 51.4, production at 55.4, delivery lead time at 54.6, inventories at 55.8 and employment at 51.2. “Our monthly survey points to slowing but positive growth for Oklahoma in the months ahead. Telecommunication and information firms detailed pullbacks for May, while durable goods producers outside auto and auto-related industries reported upturns for May,” said Goss.

South Dakota: The Business Conditions Index for South Dakota was down slightly from April’s very strong reading. The index from a monthly survey of supply managers and business leaders in the state weakened slightly to 62.7, from April’s robust 62.8. Components of the May overall index were new orders at 65.6, production at 59.4, delivery lead time at 62.5, inventories at 50.0, and employment at 68.8. “Manufacturing growth for May was very healthy with both durable and nondurable producers reporting upturns in business activity, including employment. Contrary to food processors in the rest of the region, South Dakota food producers experienced growth in economic activity for the month,” said Goss.

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.