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Flooding Slows Economic growth

Mid-America Business Conditions Index

Interview with Ernie Goss MP3 file

June survey results at a glance:

  • Business conditions index rises slightly above growth neutral.
  • Prices-paid index indicates excessive inflationary pressures.
  • Region loses jobs for the fifth time in six months.
  • Expansions in export orders prevent even more significant economic erosion. 

Flooding Slows Economic Growth in Iowa and Missouri as the Index for Mid-America Region Moves Slightly above Growth Neutral for June

Inflationary pressures at the wholesale level remained high as the overall index for the Mid-America region advanced to a reading only slightly above growth neutral, according to the June Business Conditions survey of supply managers and business leaders in the nine-state region.

The Business Conditions Index, a leading economic indicator, grew slightly to 50.5 from May’s even weaker 49.6 and April’s 55.5. “Flooding in Iowa and Missouri and economic weakness in Kansas and Nebraska produced indicators for the month that show a regional economy teetering on recession with excessive inflationary pressures in the economic pipeline,” Creighton University Economics Professor Ernie Goss said today.

Surging energy and commodity prices have pushed the inflation gauge above 90.0.
The index, which tracks the cost of raw materials and supplies, slipped to 91.7 from 92.0 in May and 93.1 in April.

"This is the first time since we initiated the survey in 1994 that we have recorded these levels of inflationary pressure for four straight months. When the Federal Reserve’s rate-setting committee meets again on Aug. 5, it will face its toughest decision in more than a decade. Even though the national and regional economies are clearly weak, current excessive inflationary pressures in the pipeline will prevent a rate cut, and may force a rate increase. I think there is better than a 60 percent chance of an interest-rate increase at the August meeting,” said Goss.

The monthly employment index dropped below growth neutral for the fifth time this year with a very weak reading of 46.2, its lowest level since September 2002, and down from May’s 46.8 and April’s 49.0. As in previous months, job expansions linked to exports and agricultural equipment sales were more than offset by deterioration in the regional job market with the exception manufacturing and value-added services.

Looking ahead six months, supply managers’ economic optimism, captured by the confidence index, dipped to 35.1 from May’s frail 38.2. “Higher energy and commodity prices combined with June flooding undermined economic confidence for the month,” said Goss, director of Creighton’s Economic Forecasting Group and the Jack A. MacAllister Chair in Regional Economics.

Growth in new export orders for the region offset other less positive economic indicators for the month. “The cheap dollar, which makes U.S. goods less expensive abroad, pushed the new export-orders index to a robust 59.2 from May’s strong 58.0, and April’s healthy 56.6. At the same time, the weak dollar has increased the price of imported goods, such as oil, and pushed the import reading to a still too high 53.8, from 56.4 in May. The national and regional addiction to oil has prevented the import index from descending even further,” said Goss.

Other components of the month’s Business Conditions Index were new orders at 46.6, down from May’s 47.8; production at 54.4, up from 47.3; and inventories at 49.0, down from 52.7. Flooding in portions of the region forced the delivery lead time index up to 58.7 from May’s 58.5. “Both railroad and trucking firms experienced difficulties in shipping goods in a timely manner for the month,” said Goss.

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 October 2007, the leading economic indicator for Arkansas declined. The June index, based on a monthly survey of supply managers, slipped to a still healthy 59.2 from 61.7 in May. Components of the overall index for June were new orders at 60.5, production at 57.5, delivery lead time at 73.7, inventories at 44.7, and employment at 55.3. “Despite the pullback for the month, Arkansas trade numbers were healthy with an export order reading of 58.3 and imports of 46.2. Firms in the state have begun to cut back new construction projects as the economy has slowed,” said Goss.

Iowa: Widespread flooding in Iowa pushed the Business Conditions Index to its lowest level in more than two years and well below growth neutral. The index, from a survey of supply managers, plummeted to 44.3 from 56.6 in May and 60.5 in April. Components of the overall index for June were new orders at 35.7, production at 50.0, delivery lead time at 50.2, employment at 42.9, and inventories at 50.0. “Firms not directly affected by the floods were indirectly and negatively influenced by June’s weather. Transportation bottlenecks and infrastructure outages continue to be a significant negative for many firms in Iowa. Prior to weather-related business interruptions, Iowa firms had been clearly outperforming those in the rest of the region. I expect to record a burst of economic activity in the coming months from rebuilding connected with June flooding,” said Goss.

Kansas: For a second consecutive month, the Kansas Business Conditions Index plummeted to a regional low of 42.7 from May’s 42.8 and April’s 55.0. Components of the overall index for June were new orders and production at 38.9, delivery lead time at 61.3, employment at 27.8, and inventories at 66.7. “Weakness in food-processing, information and telecommunications companies more than offset June growth among durable-goods manufacturing firms. New export orders were a very healthy 61.1, primarily linked to increased trade activity for durable-goods producers in Kansas,” said Goss.

Minnesota: For the fourth time in the past six months, the Business Conditions Index from a survey of supply managers in Minnesota slipped below growth neutral. The index, a leading economic indicator, declined to 49.0 from May’s tepid 51.8. Components of the overall index for June were new orders at 48.1, production at 50.9, delivery lead time at 57.4, inventories at 49.1, and employment at 41.5. “Minnesota firms experienced weak business activity for June. Pullbacks for transportation-equipment manufacturers and food processors more than offset expansions for other manufacturers. The Minnesota business confidence index at 29.6, was the lowest in the nine-state region and reflects the economic uncertainty facing firms in the state,” said Goss.

Missouri: Flooding in Missouri helped push the Business Conditions Index below growth neutral for the fifth consecutive month. Despite weather-related issues, the index, climbed slightly in June to 46.5 from 45.6 in May but down from 49.7 in April. Components of the overall index from the June survey were new orders at 45.7, production at 48.5, delivery lead time at 59.5, inventories at 50.0, and employment at 33.8. “On a seasonally adjusted basis, Missouri has lost almost 15,000 jobs in 2008. Based on our survey, I expect these losses to continue as firms with linkages to domestic auto production are expected to shed jobs and reduce business activity for the remainder of 2008. On the other hand, we are tracking improving economic conditions for telecommunications firms in the state,” said Goss.

Nebraska: For the fifth time this year, Nebraska’s Business Conditions Index descended below growth neutral. The index, from a survey of supply managers, slumped to 46.9 from May’s 50.3. Components of the overall index for June were new orders at 39.4, production at 43.9, delivery lead time at 57.6, inventories at 48.5, and employment at 53.0. “Weakness among firms with connections to domestic automobile manufacturing, food processing and information technology offset healthy growth among firms with ties to agriculture and the global economy. The June new export orders index reflected this strength at 58.3,” said Goss.

North Dakota: North Dakota’s Business Conditions Index climbed to a regional high of 62.4. The index, a leading economic indicator, advanced from May’s 58.5. Components of the overall index for June were new orders at 62.5, production at 58.3, delivery lead time at 62.5, employment at 70.8, and inventories at 55.0. “While the pace of growth is slowing in North Dakota, it clearly exceeds that of the region and nation. However, North Dakota continues to benefit from a cheap U.S. dollar. The June new export-orders index rose to a regional high of 83.3. Additionally growth from firms with ties to agriculture and the state’s mining and natural resources industry continue to experience positive conditions,” said Goss.

Oklahoma: Oklahoma was one of four states in the region with a June Business Conditions Index above growth neutral. The index, a leading economic indicator from a survey of supply managers, advanced to 51.0 from May’s 49.6. Components of the overall index for June were new orders at 50.0, production at 49.1, delivery lead time at 51.1, inventories at 50.2, and employment at 40.0. “Contrary to most of the region, Oklahoma has not benefited to any large degree from healthy farm income and exports. For example, Oklahoma’s June export orders index was a weak 33.3. Instead, Oklahoma firms with strong ties to energy continue to experience strong growth. In June as in prior months, Oklahoma firms connected to domestic automobile production experienced very weak economic conditions,” said Goss.

South Dakota: For the first time since March of this year, South Dakota’s Business Conditions Index advanced. The index, a leading economic indicator from a survey of supply managers, rose to 57.0 from May’s 53.5 and April’s 53.9. Components of the overall index for June were new orders at 50.0, production at 65.6, delivery lead time at 50.0, inventories at 50.1, and employment at 65.6. “While South Dakota’s growth has clearly cooled, it remains above that of the region and nation. Firms with connections to agriculture and energy continue to benefit from higher commodity prices. The business confidence index was a low 43.8; it was second only to Arkansas,” 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.