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Mid-America Business Conditions Index

Mid-America Business Conditions Index


August survey results at a glance:

• Business conditions index dips to lowest level of the year
• Job creation was the slowest in more than four years
• Business confidence tumbled for the month
• Inflation gauge still on the rise

Mid-America Leading Economic Indicator Drops to Lowest Level of the Year: Survey Indicates Hint of Recession

Inflationary pressures at the wholesale level remained high as the overall index for the Mid-America region declined to its lowest level of the year, according to the August Business Conditions survey of supply managers and business leaders in the nine-state region.

The Business Conditions Index, a leading economic indicator, dipped to 56.0, its lowest level of the year from July’s healthy 57.8. “I was surprised at the strength of the August survey given that it was conducted after the recent credit crunch. Even so, we are tracking slower growth with the downward trend matching pullbacks we recorded prior to the 2001 recession. At this point-in-time, it is too early to report an imminent recession, but it is clear that we are heading into a period of much slower growth,” Creighton University Economics Professor Ernie Goss said today.

"On the positive side, very healthy farm income and biofuels production have supported growth in the regional economy with the expansion fueling growth for many industries including trucking and railroads shipping output and ethanol waste. However, the negative spillovers from the mortgage crisis and housing pullbacks will restrain regional growth to unacceptably low levels," 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, rose slightly to 71.7 from July’s 70.4. Over the past several months the index has indicated waning, but still elevated, inflationary pressures at the wholesale level.

“While the futures market has priced in a 100 percent likelihood of a rate cut at the Sept. 18 meeting of the Federal Reserve’s Open Market Committee, I still think there is room for the Fed to hold off on reducing short-term interest rates. Inflationary pressures recorded in our survey and other surveys are too high for a rate cut during normal times, but these are not normal times. Slowing growth accompanying the downturn in the housing sector and mortgage defaults will likely push the Fed to lower rates by a quarter of a percentage point at its next meeting,” said Goss.

Looking ahead six months supply managers’ economic optimism, captured by the confidence index, declined to 51.7 from July’s 53.3. “Our survey was conducted after the recent credit crisis. It is evident that the August mortgage upheaval had a significant negative influence on survey participants’ economic outlook. The August reading is only slightly above the 51.4 recorded in August 2001 before the recession,” said Goss.

The August employment index for August plunged to 50.0, its lowest level in more than four years and was down from July’s healthy 57.4 and June’s 59.0.

“I expect job growth in the fourth quarter for the region to be weak with a potential net loss of jobs. The kinks in the national economy, driven by the housing downturn and increasing mortgage defaults, are now restraining job growth in the Mid-America region. Rate cuts by the Fed will likely avert significant losses,” said Goss.

Trade numbers weakened for August. New export orders slumped to 51.6 from July’s 56.8. Imports declined slightly to 56.9 from 57.0 in July and 60.4 in June. The weak dollar, especially against the Euro, making foreign goods more expensive in the United States has pushed import growth lower. At the same time, imports from Asia, along with high oil prices, have kept imports significantly above growth neutral.

Other components of the month’s Business Conditions Index were new orders at 58.3, down from July’s 58.9; production at 59.4, down from 62.7; inventories at 55.4, up from 53.7; and delivery lead time at 53.8, up from 50.9.

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.

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