March survey results at a glance:
- Business conditions index rebounds above growth neutral.
- Prices paid index soars to record high.
- Export orders help push overall index into a positive growth range.
- High agriculture commodity prices push economy forward.
Job Market Improves in Mid-America Region but with Excessive Inflation
Inflationary pressures at the wholesale level soared to a record high as the overall index for the Mid-America region expanded above growth neutral 50.0, according to the March Business Conditions survey of supply managers and business leaders in the nine-state region.
The Business Conditions Index, a leading economic indicator, advanced to 54.3 from February’s 49.5 and January’s weak 50.6.
“The positive gap between the Mid-America economy and the U.S. economy can be explained by two factors. First, there is less fallout from the downturn in the housing market and second, there is record farm income stemming from very high agricultural commodity prices,” Creighton University Economics Professor Ernie Goss said today.
An average 100 million gallon-per-year ethanol plant consumes about 33 million bushels of corn each year. “This means that in 2007, ethanol plants used over two billion bushels of corn, or roughly the entire 2007 corn harvest for the nation’s largest corn producer, Iowa, or four times the Kansas 2007 corn harvest. The Mid-America region has more than 62 percent of the nation’s operational or soon-to-be operational ethanol plants. Thus, the U.S. biofuels expansion continues to have profound impacts on the region in terms of very strong agriculture commodity prices and construction activity surrounding new and expanding ethanol plants,” said Goss, director of Creighton’s Economic Forecasting Group and the Jack A. MacAllister Chair in Regional Economics.
However, surging agriculture commodity prices have pushed the inflation gauge to its highest level since the survey began in 1994. The gauge, which tracks the cost of raw materials and supplies, advanced to 90.3 from February’s 88.8 and January’s 79.9. On top of this, the region’s employment index advanced to a tepid, but improving 52.4 from February’s weak 48.9 and January’s 46.8.
“Given the unexpected upturn in the regional job market, the real danger now is excessive inflationary pressures,” said Goss.
The Federal Reserve rate setting committee meets again April 29-30. “The likelihood of a rate cut at that meeting has been significantly reduced in my judgment. If the federal government employment report this Friday shows March job growth above 100,000, I expect the Fed to forgo a rate cut. Anything less that 100,000 will probably result in another rate cut,” reported Goss.
Sales abroad were an important source of March growth. “The cheap dollar, which is making U.S. goods less expensive among our trading partners, pushed the new export orders index to a healthy 57.5 for March, up from February’s 56.3. Though the weak dollar has increased the price of imported goods such as oil, it has failed to restrain imports, which surged to 57.9, up from February’s 52.1,” said Goss.
Looking ahead six months, supply managers’ economic optimism, captured by the confidence index, rose slightly to a very weak 38.0 from February’s 37.8. “Despite an improving regional economy, supply mangers’ outlook has been undermined by the national downturn in housing, elevated inflationary pressures, and the subprime mortgage crisis,” said Goss.
Other components of the month’s Business Conditions Index were new orders at 55.8, up from February’s 44.6; production at 57.7, up from 51.1; inventories at 56.3, up from 53.2; and delivery lead time at 46.7, down from 54.7.
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 historical data and state forecasts visit the Economic Outlook website at: www2.creighton.edu/business/economicoutlook