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Mid-America Business Conditions Index Surges for December

Mid-America Business Conditions Index Surges for December, Largest One-Month Increase in Almost Five Years

December survey results at a glance:
• Business conditions index takes biggest one-month jump since February 2002.
• Cheap dollar stimulates export orders.
• Region adds jobs for the first time since September.
• Confidence index continues to languish.
• Higher energy prices push inflation gauge to highest level since March 2007.

 Inflationary pressures at the wholesale level advanced to their highest level since March 2007 as a surge in new export orders pushed the overall index for the Mid-America region up by its largest amount since February 2002, according to the December Business Conditions survey of supply managers and business leaders in the nine-state region.

The Business Conditions Index, a leading economic indicator, soared to 55.0 from November’s weak 49.2 and October’s tepid 50.1.

“Since moving below growth neutral last month, overall economic activity improved significantly among firms in our survey. While the downturn in housing and related credit issues continues to be a drag on growth for many industries, very strong farm income and upturns associated with alternative energy production more than offset this weakness. While this is very good news, I remain concerned that the region could still dip into recession territory in early 2008. Economic reports over the next several months will obviously be very important,” Creighton University Economics Professor Ernie Goss, said today.

Pushed higher by rising oil prices, the inflation gauge indicates elevated inflationary pressures in the economic pipeline. The prices-paid index, which tracks the cost of raw materials and supplies, expanded to 78.4 from November’s elevated 78.0, almost matching the 2007 high of 81.7 in April.

Trade numbers improved significantly for December. New export orders rocketed to 65.4 from November’s 50.7 and October’s 50.0. Imports were up at 57.0 from November’s 56.8.

“Finally the weak dollar, which has made U.S. goods cheaper abroad, has begun to have marked impacts on new exports orders. Even with the cheaper dollar, imports from Asia, along with high oil prices, have kept imports significantly above growth neutral,” said Goss, director of Creighton’s Economic Forecasting Group and the Jack A. MacAllister Chair in Regional Economics.

“The Federal Reserve (Fed) rate-setting committee meets again Jan. 29-30. This is stacking up to be one of the most difficult meetings of the Bernanke Fed. With inflation exceeding levels deemed acceptable and economic growth significantly below an acceptable pace, there is the possibility that the Fed may forego a rate change at its January meetings. However, I still place the likelihood of a rate cut above 50 percent. If the Jan. 4 employment report from the Bureau of Labor Statistics is very weak, I expect another rate cut at the end of the month despite elevated inflationary pressures in the supply chain,” said Goss.

The employment index advanced to 54.1 from November’s 47.3 and October’s 49.5. “This is first time since September that the firms that we track have added jobs. However, a large upturn for one month does not convince me that the job market has turned the corner," reported Goss.

Looking ahead six months, supply managers’ economic optimism, captured by the confidence index, rose to a still weak 45.9 from 41.7 in November. “Despite record farm income for much of the region, the continuing difficulties in the housing sector and credit markets, combined with higher energy prices, have weakened survey participants’ economic outlook. For this part of the country, the real negative factor is rising energy prices,” said Goss.

Other components of the month’s Business Conditions Index were new orders at 56.9, up from 49.4 in November; production at 56.8, up from 50.6; inventories at 53.4, up from 50.0; and delivery lead time at 50.7, down from 54.8.

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: For the first time since May 2007, Arkansas’ leading economic indicator advanced above growth neutral. The index expanded to 53.3 from November’s weak 44.2. Components of the overall index for December were new orders at 53.8, production at 50.0, delivery lead time at 61.5, inventories at 46.2, and employment at 53.8. “While this was certainly a good report, I need to see another couple of healthy months of growth before I become more bullish on the Arkansas economy. I expect the unemployment rate to rise slightly in the first quarter of 2008 before it stabilizes and moves lower by mid-year,” said Goss. The best of 2007: Telecommunications. The worst of 2007: Construction.

Iowa: Iowa’s Business Conditions Index rebounded for December. After plunging below growth neutral last month, the overall index expanded to 52.9 from 49.2 in November. Components of the overall index for December were 54.2 for new orders, 52.8 for production, 49.3 for delivery lead time, 53.9 for employment, and 52.3 for inventories. “The number of unemployed in the state is about 5,000 higher than this time last year. I expect the jobless rate to rise slightly in the first quarter of 2008 before it stabilizes and declines by mid-year. While farm income remains a real catalyst for overall state growth, high corn prices and rising energy prices are challenging for Iowa’s livestock producers and are negatively affecting their vendors,” said Goss. The best of 2007: Agriculture machinery manufacturing, The worst of 2007: Transportation Equipment Manufacturing

Kansas: For the fifth consecutive month, the Kansas Business Conditions index declined. The index, a leading economic indicator from a monthly survey of supply managers in the state, tumbled to 44.2 from November’s 49.4 and October’s 53.4. Components of the overall index for December were new orders at 41.7, production at 45.8, delivery lead time at 54.2, employment at 45.8, and inventories at 29.2. “The number of Kansas unemployed has declined by roughly 9,000 over the past 12 months. Based on our survey, I expect the state’s jobless rate to increase during the first quarter of 2008 before it stabilizes by mid-year. Losses connected to industries to ties with telecommunications and residential housing will more than offset growth associated with the state’s transportation equipment manufacturers,” said Goss. The best of 2007: Aircraft and aviation equipment manufacturing. The worst of 2007: Telecommunications

Minnesota: For the third straight month, Minnesota’s Business Conditions Index dipped, moving below growth neutral to 47.3 from November’s 50.8 and October’s 54.1. Components of the overall index for December were new orders at 44.7, production at 52.6, delivery lead time at 50.0, inventories at 50.0, and employment at 41.0. “The Minnesota economy continues to be battered by weakness in housing and durable goods manufacturing. This has raised the number of unemployed by almost 10,000 from the same time last year. Based on our survey, I expect the jobless rate to rise by another 0.2 percent in the first quarter of 2008 before it stabilizes,” said Goss. The best of 2007: Finance and Insurance. The worst of 2007: Telecommunications

Missouri: The Missouri Business Conditions Index once again moved above growth neutral to a healthy 58.1 from November’s 53.3 and October’s 55.1. Components of the overall index from the December survey were new orders at 57.7, production at 61.5, delivery lead time at 52.4, inventories at 61.3, and employment at 57.3. “Missouri is the most manufacturing-intensive state in the Mid-America region. Rapid increases in productivity and downturns in transportation equipment manufacturing have resulted in slow job growth in the state, even with solid economic growth. As a result, the number of unemployed is approximately 10,000 above this time last year. I expect the state’s jobless rate to stabilize and move lower by mid-2008,” said Goss. The best of 2007: Truck Transportation; The worst of 2007: Finance and Insurance

Nebraska: The December Business Conditions Index for Nebraska rose to a still weak 45.7 from 43.8 in November and 51.9 in October. Components of the overall index for December were 50.0 for new orders, 39.1 for production, 47.8 for delivery lead time, 37.0 for inventories, and 50.0 for employment. “The number of unemployed in Nebraska has expanded by more than 2,000 since this time last year. I expect state’s jobless rate to grow by another 0.3 percent in the first quarter of 2008. Higher corn prices have propelled crop farming while negatively affecting the Nebraska livestock producer. The corn prices combined with soaring energy prices, have also hurt Nebraska’s large food-processing industry,” said Goss. The best of 2007: Agriculture machinery manufacturing. The worst of 2007: Food processing

North Dakota: North Dakota’s Business Conditions Index rose to a regional high for December. The index, a leading economic indicator from a monthly survey of supply managers in the state, increased to 72.7 from November’s robust 71.0 and October’s 69.3. Components of the overall index for December were new orders at 71.4, production at 75.0, delivery lead time at 87.5, employment at 62.5, and inventories at 68.8. “North Dakota’s number of unemployed is approximately 1,000 less than this time last year. I expect the unemployment rate to stabilize at its current low level through the first quarter of 2008,” said Goss. The best of 2007: Truck transportation. The worst of 2007: Food Processing

Oklahoma: The Business Conditions Index for Oklahoma soared for December. After plummeting to a regional low of 37.2 for November, the index advanced to 57.8 in December. Components of the overall index for December were new orders at 60.0, production at 75.0, delivery lead time at 40.0, inventories at 70.0, and employment at 40.0. “The number of unemployed Oklahomans is roughly 8,000 higher than this time last year. Based on our survey, I expect the jobless rate to grow by another 0.2 percent in the first quarter of 2008 before it stabilizes in the second quarter. The Oklahoma telecommunications industry, unlike its counterparts in other states, continues to expand at a solid pace,” said Goss. The best of 2007: Telecommunications. The worst of 2007: Transportation equipment manufacturing

South Dakota: After declining for three straight months, South Dakota’s Business Conditions Index expanded to 53.5 from 51.6 in November. Components of the December overall index were new orders at 53.6, production at 53.8, delivery lead time at 42.9, inventories at 67.9, and employment at 53.6. “South Dakota’s number of unemployed is approximately 1,500 less than this time last year, even as computer and electronic manufacturers detailed pullbacks. I expect South Dakota’s unemployment rate to stabilize at its current low value through the first quarter of 2008, even as the state’s economy continues to expand,” said Goss. The best of 2007: Food Processing. The worst of 2007: Construction

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.