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High Energy Prices And Housing Downturn Hammer Mid-America Economy

High Energy Prices And Housing Downturn Hammer Mid-America Economy

SURVEY POINTS TO LACKLUSTER HOLIDAY SHOPPING SEASON  

Survey results at a glance:

  • Business Conditions Index declined to its lowest level in almost five years.
  • Region lost jobs for the month.
  • Inflation index rises to highest level since June.
  • Survey points to lackluster holiday buying season

For Immediate Release: Nov. 1, 2007

Inflationary pressures at the wholesale level advanced to their highest level since June as the overall index for the Mid-America region plummeted to its lowest level in almost five years, according to the October Business Conditions survey of supply managers and business leaders in the nine-state region.

The Business Conditions Index, a leading economic indicator, deteriorated to 50.1, slightly above growth neutral, from September’s healthy 56.7. “Since June, we have been tracking slower growth. However, October’s survey produced the first clear signal that the regional economy is dramatically slowing down. If the overall readings from the survey for November and December move below 50.0, I expect the economy to enter a recession in early 2008,” Creighton University Economics Professor Ernie Goss said today.

The employment index dipped to 49.5, its lowest level since the beginning of the war with Iraq. The downturn in housing coupled with higher oil prices have begun to take a toll on job creation in the region, according to Goss.

“Even though very strong farm income, has underpinned growth for many of the states, the slowdown in the economy will spell a lackluster holiday shopping season for most merchants in the region," said Goss, director of Creighton’s Economic Forecasting Group and the Jack A. MacAllister Chair in Regional Economics.

The prices-paid index, which tracks the cost of raw materials and supplies, expanded to 73.4, its highest level since June, and up from September’s 71.6. Pushed higher by rising oil prices, the inflationary gauge indicates elevated pressures in the economic pipeline. While the Federal Reserve reduced short-term interest rates on Oct. 31, excessive inflationary pressures will prevent the Federal Reserve from being too aggressive with its rate reductions.

“The next meeting of the Fed’s interest rate setting committee is Dec. 11. Between now and then, there will be two employment reports and another report of supply managers that will be released on Dec. 3. These will be prime ingredients in the Fed’s decision on a rate change at the December meeting,” said Goss.

Looking ahead six months, supply managers’ economic optimism, captured by the confidence index, declined to 47.2, its lowest level since November 2002, and down from September’s weak 51.8. “Despite healthy farm income, the continuing difficulties in the housing sector and the mortgage industry have weakened survey participants’ economic outlook. We are beginning to see the problems with the national economy bleed into the Mid-America region, affecting the business outlook,” said Goss.

Surprisingly, trade numbers weakened in October. New export orders waned to 50.0 from September’s 56.6. Imports dipped to 54.1 from 60.5 in September.

“Despite the weak dollar, which has made U.S. goods cheaper abroad, new export orders slumped to their lowest level in almost a year. This is another signal of a slowing of the global economy. Even so, imports from Asia, along with high oil prices, have kept imports significantly above growth neutral,” said Goss.

Other components of the month’s Business Conditions Index were new orders at 49.4, down from September’s 59.9; production at 51.6, down from 59.3; inventories at 45.6, down from 50.6; and delivery lead time at 52.6, down from 54.3.

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