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Mid-America Business Conditions Index

Mid-America Business Conditions Index Dips Below Growth Neutral Again

February survey results at a glance:

  • Business conditions index dips below growth neutral for second time in four months
  • Prices paid index highest since 1995
  • Region loses jobs for fourth time in the past five months
  • Confidence plummets to lowest level since before the 2001 recession

Inflationary pressures at the wholesale level soared to their highest level in thirteen years as the overall index for the Mid-America region dipped below growth neutral 50.0 for the second time in the past four months, according to the February Business Conditions survey of supply managers and business leaders in the nine-state region.

The Business Conditions Index, a leading economic indicator, slumped to 49.5 from January’s weak 50.6.

“While Federal Reserve Chairman Bernanke has downplayed the probability of a combination of excessive inflationary pressures and negative growth, the likelihood of such an outcome is clearly rising according to our survey. We are tracking an economy that is experiencing job losses with significantly elevated inflationary pressures in the economic pipeline,” Creighton University Economics Professor Ernie Goss said today.

Pushed higher by rising oil and commodity prices, the inflation gauge rose for the fifth consecutive month indicating elevated inflationary pressures in the economic pipeline. The gauge, which tracks the cost of raw materials and supplies, advanced to 88.8 from 79.9 in January.

“The Federal Reserve (Fed) interest rate-setting committee meets again on March 18. At this time, the Fed is more concerned about the economic slowdown than inflation. Thus, I expect the Fed to cut short-term rates by a quarter percent rather than an aggressive half-percent or 50 basis points. Furthermore due to excessive inflationary pressures for 2008, the Fed will not be able to be repeat its aggressive 2001 rate reductions,” said Goss, director of Creighton’s Economic Forecasting Group and the Jack A. MacAllister Chair in Regional Economics.

The employment index advanced to a still weak 48.9 from January’s 46.8, which was the lowest reading in more than five years. “I expect the overall region to continue to lose jobs until the middle of 2008 though several states will actually be increasing employment levels for all of 2008," said Goss

Looking ahead six months, supply managers’ economic optimism, captured by the confidence index, plunged to 37.8 from January’s 38.8. “This is the lowest confidence index that we have recorded since 2000, or shortly before the March 2001 recession began. Despite record farm income for much of the region, higher energy prices and the spillover from the national economic downturn have weakened survey participants’ economic outlook,” said Goss.

“The cheap dollar making U.S. goods less expensive abroad improved new export orders with a February reading of 56.3, up from 48.6 in January. The weak dollar has, on the other hand, increased the price of imported goods such as oil, but failed to restrain imports with a February index of 52.1 which was up from January’s 49.4. Despite all of the negative political blather about NAFTA, I expect the export of U.S. goods from the region for 2008 to exceed $30 billion for 2008 and be an important factor underpinning the economy,” said Goss.

Other components of the month’s Business Conditions Index were new orders at 44.6, down from January’s 52.3; production at 51.1, up from 50.5; inventories at 53.2, up from 46.8; and delivery lead time at 54.7, up from 52.8.

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.

For historical data and forecasts visit website at: http://www.creighton.edu/business/economicoutlook/

For ongoing commentary on recent economic developments, visit our blog at: www.economictrends.blogspot.com.