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Leading Economic Indicator Oves Below Growth Neutral

May Mid-America Business Conditions Index

Survey results at a glance:

  • Business conditions index drops below growth neutral for second time in four months.
  • Prices-paid index indicates excessive inflationary pressures.
  • Region lost jobs for the fourth time in five months.
  • Expansions in export orders prevent even more significant economic erosion.

Mid-America Leading Economic Indicator Moves Below Growth Neutral: Inflationary Pressures Remain Brisk

Inflationary pressures at the wholesale level remained high as the overall index for the Mid-America region plummeted below growth neutral for the second time in four months, according to the May Business Conditions survey of supply managers and business leaders in the nine-state region.

The Business Conditions Index, a leading economic indicator, slumped to 49.6 from April’s 55.5. “Unlike the national economy, the downturn in housing and related mortgage issues have had significantly less impact here. However, record oil prices, combined with soaring commodity prices, have had significant and negative impacts on the businesses that we survey each month,” Creighton University Economics Professor Ernie Goss said today.

Surging energy and commodity prices have pushed the inflation gauge to its second highest level since the survey began in 1994. “The gauge, which tracks the cost of raw materials and supplies, slipped slightly to a still excessively high 92.0 from 93.1 in April. The Federal Reserve rate-setting committee meets again June 24-25. Even though the national and regional economies are clearly weak, current excessive inflationary pressures in the pipeline will force the Fed to forgo any more rate cuts for 2008. In my judgment, excessive inflation is the most ominous problem facing the Fed and the U.S. and regional economies,” said Goss.

“The monthly employment index dropped below growth neutral for the fourth time this year with a very weak reading of 46.8 for May, down from April’s 49.0 and March’s 52.4. May’s reported job losses were primarily in value-added services. As in previous months, expansions in exports and agricultural-equipment sales pushed manufacturing job growth into positive territory for the month.”

Looking ahead six months supply managers’ economic optimism, captured by the confidence index, advanced to a still weak 38.2 from April’s record low 29.4. “The regional economic outlook has been undermined by the national downturn in housing, the subprime mortgage crisis and especially by record oil and gasoline prices,” said Goss, director of Creighton’s Economic Forecasting Group and the Jack A. MacAllister Chair in Regional Economics.

New export orders were a factor underpinning the regional economy for May. “The cheap dollar, which is making U.S. goods less expensive among our trading partners, pushed the new export-orders index to a strong 58.0 from April’s 56.6 and March’s 57.5. Though the weak dollar has increased the price of imported goods such as oil, it has failed to restrain imports to any great degree with an import reading of 56.4, up from 55.3 in April,” said Goss.

Other components of the month’s Business Conditions Index were new orders at 47.8, down from April’s 55.0; production at 47.3, down from 55.0 in April; inventories at 52.7, down from 56.4 in April; and delivery lead time at 58.5, down from 59.2.

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 expansionaryeconomy over the course of the next three to six months.

Arkansas: Arkansas’ leading economic indicator expanded for a seventh straight month. The index, based on a monthly survey of supply managers, advanced to a regional high of 61.7, up from 58.5 in April and 56.9 in March. Components of the overall index for May were new orders at 63.2, production at 60.5, delivery lead time at 78.9, inventories at 52.6, and employment at 52.6. “Manufacturing firms with a strong international presence continue to report growth with new export orders for May coming in at a very strong 70.8. On the other hand, growth was much less robust for manufacturing firms dependent on domestic business,” said Goss.

Iowa: For the first time since December 2007, Iowa’s Business Conditions Index declined. The index, from a survey of supply managers, dipped to 56.6 from April’s 60.5. Components of the overall index for May were 55.3 for new orders, 63.2 for production, 52.8 for delivery lead time, 52.6 for employment, and 58.3 for inventories. “Overall it was a good report for Iowa. Durable-goods producers reported much stronger growth for May while nondurable goods manufacturers detailed pullbacks in economic activity for May. Growth was especially strong for agricultural-machinery manufacturers for May,” said Goss.

Kansas: The Business Conditions Index for Kansas plummeted to a regional low for May. The index, a leading economic indicator from a survey of supply managers, tumbled to 42.8 from 55.0 in April. Components of the overall index for May were new orders at 42.3, production at 39.8, delivery lead time at 61.1, employment at 33.3, and inventories at 44.4. “Pullbacks in business activity for May for telecommunications firms and food processors slowed the state economy for the month. On the other hand, businesses with close ties to the state’s large aircraft manufacturing industry continued to report expansions,” said Goss.

Minnesota: Minnesota’s Business Conditions Index from a survey of supply managers slumped to a tepid reading. The index, a leading economic indicator, slipped to 51.8 from April’s 55.1. Components of the overall index for May were new orders at 52.9, production at 51.9, delivery lead time at 58.5, inventories at 51.0, and employment at 45.2. “Durable-goods producers in the state reported healthy business activity for May. The cheap U.S. currency, especially against the Canadian dollar, has been an important ingredient in Minnesota’s economy and has partially offset weakness in other areas. The May new export orders index was a healthy 61.8,” said Goss.

Missouri: For the fourth straight month, Missouri’s Business Conditions Index slumped below growth neutral. The index, a leading economic indicator from a survey of supply managers slipped to 45.6 from 49.7 in April. Components of the overall index from the May survey were new orders at 45.4, production at 43.2, delivery lead time at 54.6, inventories at 41.4, and employment at 44.1. “Durable goods producers, especially transportation equipment and parts manufacturers and computer and electronic component producers, reported very weak business activity for May. Except for food-processing firms, nondurable goods producers experienced weaker economic conditions for May,” said Goss.

Nebraska: Nebraska’s Business Conditions Index slipped slightly for the month. The index dipped to 50.3 from April’s tepid 51.0. Components of the overall index for May were 47.2 for new orders, 49.9 for production, 55.4 for delivery lead time, 52.8 for inventories, and 50.3 for employment. “Durable-goods producers, especially those with strong ties to the farm economy, such as agricultural-equipment manufacturers, reported strong growth for May. On the other hand, information firms, such as publishing companies, detailed pullbacks in business activity for May and more than offset strength in other areas,” said Goss.

North Dakota: For a second straight month, North Dakota’s Business Conditions Index declined to a still healthy 58.5 from April’s 64.6. Components of the overall index for May were new orders at 62.5, production at 56.3, delivery lead time at 50.0, employment at 62.5, and inventories at 57.1. “For the first time in several years, we are detecting a slowdown in the rapid growth we have been tracking in North Dakota’s economy. However, North Dakota continues to benefit from a cheap U.S. dollar. The state’s new export orders index rose in May to a regional high of 75.0. Both durable and nondurable goods producers reported healthy but somewhat softer business activity for May,” said Goss.

Oklahoma: The Business Conditions Index for Oklahoma slipped below growth neutral for May. The index, a leading economic indicator, slumped to 49.6 from April’s 53.4. Components of the overall index for May were new orders at 50.0, production at 41.8, delivery lead time at 64.3, inventories at 50.1, and employment at 47.5. “Pullbacks reported by nondurable-goods manufacturers and telecommunication firms accounted for much of May’s weaker reading. Durable-goods producers detailed solid growth for the month but it was not sufficient to offset weakness in other areas,” said Goss.

South Dakota: For a second consecutive month, South Dakota’s Business Conditions Index slipped to 53.5 from April’s 53.9 and March’s 57.3. Components of the overall index for May were new orders at 42.3, production at 61.5, delivery lead time at 46.2, inventories at 69.2, and employment at 57.7. “Growth in South Dakota’s economy is likely to continue to cool in the months ahead. However, I expect it to remain positive for the next two quarters as expansions in the state’s farm economy and export growth fuel the economy,” 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.