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No Sign of Greenspan’s Recession in Mid-America; Growth Likely to Advance with Inflationary Pressures Stabilized

February survey results at a glance:

• Business Conditions Index advances to its highest level since July 2006

• Inflation gauge stabilizes

• Confidence tumbles amid rising oil prices

• New export orders sink 

 No Sign of Greenspan’s Recession in Mid-America; Growth Likely to Advance with Inflationary Pressures Stabilized

Inflationary pressures stabilized and economic growth advanced in the Mid-America region according to the February Business Conditions Survey of supply managers and business leaders in the nine-state region.

The overall Business Conditions Index rose for the second consecutive month to its highest level since July 2006. The index, a leading economic indicator, advanced to 58.4 from January’s 57.6 and December’s 53.0. At the same time, inflationary pressures cooled for the seventh straight month, as the prices-paid index dropped to its lowest level since July 2005. The prices-paid index, which tracks the cost of raw materials and supplies, declined to 67.0 from January’s 67.8 and December’s 68.3.

“Results from the February survey should lower the chatter surrounding this week’s economic recession assessment for 2007 by former Federal Reserve chairman Alan Greenspan. However, the region’s rate of growth is clearly surpassing that of the nation as very 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.

“Given our numbers and the latest government data, I expect the Federal Reserve to make no interest-rate changes at their next meeting on March 20-21. I do expect the Fed to maintain its bias toward raising rates despite Greenspan’s somewhat gloomy outlook. Good economic data is currently outweighing the bad,” said Goss.

New hiring for the region rose to its highest level since June of last year when the region’s growth began to weaken. The February employment index expanded for a third consecutive month to 58.6 from January’s 54.6.

“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. Job growth was much stronger for heavy manufacturing than for nondurable producers and value-added-service firms. For the region as a whole, I do expect this expansion to continue until mid-year. However, I expect a larger share of businesses in the region to report difficulty in finding and hiring qualified skilled workers in the months ahead, especially in non-urban and rural 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 56.1 from January’s much stronger 61.4 but was still up from December’s weak 47.3. “Oil prices moving above $60 per barrel in February and continuing weakness in the housing sector pushed the confidence index lower for February,” stated Goss.

Trade numbers were mixed for February. New export orders plummeted to 51.4 from 56.1 in January, while imports dropped to 54.3 from January’s 55.0.

“Slower growth among the region’s chief trading partners pulled new export orders down, while higher oil prices kept the import index at its elevated level. The real economic fear that I have regarding 2007 growth stems from an anti-trade backlash from a reactionary Congress in the months ahead as the trade deficit numbers continue to look unacceptably high to politicians,” said Goss.

Other components of February’s Business Conditions Index, were new orders at 60.2, down from January’s 61.4; production at 60.5, up from 60.3; inventories at 57.0, up from 52.5; delivery lead time at 52.6, up from 49.5; and employment at 58.6, up from 54.6.

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: After dropping below growth neutral for two of the last three months, the Business Conditions Index for Arkansas soared to its highest level since June of last year, increasing to 68.6 from January’s 51.0 and up from December’s regional low of 33.6. Components of the overall index for February were new orders at 61.1, production and delivery lead time at 66.7, inventories at 50.0 and employment at 66.2. “Over the last year, Arkansas’ unemployment rate rose more than any other state in the nation except Massachusetts. Our survey indicates that Arkansas’ jobless rate will improve in the months ahead declining below 5 percent in the second quarter of 2007,” said Goss.

Iowa: For the second consecutive month, Iowa’s Business Conditions Index advanced. The leading economic indicator from a monthly survey of supply managers and business leaders climbed to 58.1, its highest level since June of last year and up from January’s 49.0. Components of the overall index for February were 61.9 for new orders, 61.4 for production, 47.4 for delivery lead time, 59.5 for employment and 50.0 for inventories. “Soaring ethanol production and healthy farm income will be very positive drivers for the Iowa economy through the second quarter of this year. Outside of ethanol, I expect the Iowa manufacturing sector to record slower growth for the first half of 2007 than was experienced in the same period in 2006,” said Goss.

Kansas: Even though the February Business Conditions Index for Kansas rose in February, it stood at a weak and regional low of 46.3. While the leading economic indicator from a survey of supply managers in the state expanded from January’s even weaker 42.5, results point to sub-par growth for Kansas for the first half of 2007. Components of the overall index were new orders at 42.9, production at 46.4, delivery lead time at 42.5, employment at 53.6 and inventories at 46.4. “Over the past 12 months, the jobless rate in Kansas dropped by almost one-half of 1 percent. Based on our survey, I expect a reversal of this trend with the unemployment rate rising by 0.2 percent by the end of the second quarter of this year,” said Goss.

Minnesota: For the first time since October Minnesota’s Business Conditions Index expanded. The index, a leading economic indicator from a survey of supply managers and business leaders, advanced to 52.3, up from January’s 50.5 and December’s 51.7. Components of the overall index for February were new orders at 53.7, production at 52.7, delivery lead time at 57.4, inventories at 60.0, and employment at 46.3. “Minnesota’s economic growth has lagged that of the rest of the region for the second half of 2006. Based on our survey Minnesota’s growth should move to the regional average and add 22,000 jobs in the first half of 2007. Even so, I expect Minnesota’s unemployment rate, which is currently two-tenths of one percent below the nation’s rate, to exceed that of the U.S. by the end of the second quarter of this year,” said Goss.

Missouri: For the fourth consecutive month, Missouri’s Business Conditions Index grew to 64.7 from January’s 63.7 and up from 62.6 in December. Components of the overall index from the February survey were new orders at 73.6, production at 73.1, delivery lead time at 43.5, inventories at 52.8 and employment at 62.5. “Based on our survey, I expect Missouri’s economy to grow for the first half of 2007. However, the deviation in growth will be quite wide with vehicle manufacturing continuing to suffer while food processors will experience much improved growth. Furthermore, growth will be significantly higher for the rural and non-urban areas of the state with St. Louis continuing to lag the rest of the state,” said Goss.

Nebraska: Nebraska’s Business Conditions Index was almost unchanged from January’s solid reading. The index, a leading economic indicator from a survey of supply managers and business leaders, moved up slightly to 56.8 from January’s 56.6 but down from December’s 60.5. Components of the overall index for February were 54.7 for new orders, 55.8 for production, 56.8 for delivery lead time, 54.5 for inventories and 62.5 for employment. “The construction and operation of ethanol plants in Nebraska have buoyed economic and job growth over the past year driving the state’s unemployment rate down by 0.7 percent. While I do not expect the jobless rate to move lower, Nebraska will still record healthy job growth through the first half of 2007 with labor shortages surfacing in non-urban areas of the state,” said Goss.

North Dakota: For the first time since October, North Dakota’s Business Conditions Index declined. The leading economic indicator from a monthly survey of supply managers and business leaders softened to 65.5 from January’s regional high 68.1 and December’s 66.3. Components of the overall index for February were new orders at 68.2, production at 68.4, delivery lead time at 68.2, employment at 59.1 and inventories at 59.8. “We are recording significant growth among firms in North Dakota, especially those with close ties to agriculture and biofuels production. This positive trend will continue through the first half of 2007. However, labor shortages, especially for skilled labor, will restrain job growth,” said Goss.

Oklahoma: For the first time since November, Oklahoma’s Business Conditions Index strengthened to a healthy 57.9 from January’s 50.4 and up from December’s 54.8. Components of the overall index for February were new orders at 57.1, production at 60.2, delivery lead time at 42.9, inventories at 42.7 and employment at 56.9. “Over the past year, Oklahoma’s unemployment rate has declined by 0.4 percent moving below the nation’s jobless rate. Our survey indicates that Oklahoma’s unemployment rate will change little in the months ahead even as job growth remains healthy through the second quarter of 2007,” said Goss.

South Dakota: The Business Conditions Index for South Dakota was virtually unchanged from January’s healthy range. The index, a leading economic indicator from a survey of supply managers and business leaders, dropped slightly to a still solid 54.6 from January’s 54.7, but up from December’s 47.5. Components of the February overall index were new orders at 57.9, production at 57.7, delivery lead time at 50.0, inventories at 47.4 and employment at 52.6. “South Dakota’s unemployment rate has plummeted by 0.7 percent over the past year as a result of broad-based economic growth. However, growth in the biofuels industry along with a long awaited upturn in the state’s electronic manufacturing sector will produce labor shortages in certain areas. This will restrain growth in the first half of 2007 below the same period in 2006,” 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.