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Leading Economic Indicator Points to a Jobless Recovery

Leading Economic Indicator Points to a Jobless Recovery

  Audio Summary

July survey results at a glance:

  • Business conditions index rises above growth neutral for first time since August 2008.
  •  Inflation gauge indicates price pressures in the pipeline.
  •  Region sheds jobs for 18 of the past 19 months.
  • Despite economic upturn, almost 60 percent of firms expect more layoffs in 2009.

Leading Economic Indicator Points to a Jobless Recovery:
Inflation on the Horizon

The July overall index, or Business Conditions Index, for the Mid-America region, a leading economic indicator from a survey of supply managers in a nine-state area, climbed above growth neutral for the first time since August of last year. The index expanded for the seventh straight month and points to positive, but slow, economic growth for the rest of the 2009.

The Business Conditions Index, rose to 51.7 from June’s 49.3 and May’s 46.6. An index of 50.0 is considered growth neutral. “Readings over the past several months indicate that the regional economy is on the mend. I expect the nine-state region to record positive growth, but with little or no job additions for the rest of 2009,” Creighton University Economics Professor Ernie Goss said today.

The July employment index inched higher to a still weak 43.0 from 41.4 in June and 40.5 in May. “Government data show that on an annualized basis, the region lost jobs at a rate of 3.5 percent over the past three months. Our surveys over this same period indicate that job losses will continue, but at a slower pace. This month, business buyers were asked whether they expected more layoffs for their firms for the rest of 2009. Almost 60 percent expect more layoffs for the rest of 2009. Clearly the job market has been and will continue to be much weaker than the overall economy,” said Goss, director of Creighton’s Economic Forecasting Group and the Jack A. MacAllister Chair in Regional Economics.

Accompanying the improving regional economy has been rebounding prices. The prices-paid index, which tracks the cost of raw materials and supplies, moved above growth neutral for a second straight month to 61.5 from June’s 52.5 and May’s 39.3. “We are seeing the first signals of heightened inflationary pressures. I continue to expect that current Federal Reserve (Fed) interest rate policy and federal deficit spending will result in elevated inflationary pressures as early as the middle of 2010. Consumers, business leaders and investors need to brace for higher inflation and higher interest rates in 2010,” said Goss.

“I expect the Fed to raise short term interest rates before the end of 2009 in an early effort to combat rising inflationary pressures. The Fed interest rate setting committee next meets on Aug. 11. I expect no change in the current funds rate of 0 percent to 0.25 percent, its lowest level since the Federal Reserve was created in 1913, at that meeting. I expect the Fed to raise short-term rates later this year at either the November or December meeting. However, I expect this move will be too late to thwart excessive inflation surfacing in 2010,” said Goss.

Looking ahead six months, economic optimism, captured by the July confidence index, declined to a still healthy level of 62.8 from June’s 67.7. “Very low interest rates, both short-term and long-term, a stabilizing housing market and aggressive federal economic policy have clearly lifted the economic outlook of supply managers in the Mid-America region, while at the same time they have contributed to upward pressures on prices,” said Goss.

Trade numbers for July were indicative of a stronger U.S. economy, but with continuing weakness among U.S. trading partners. “The rebounding U.S. economy pushed imports higher with a July index of 52.8, up from 51.4 in June. The global recession continues to push new export orders lower with a July reading of 45.1 which was up slightly from 44.4 in June,” said Goss.

Supply managers in the nine-state region continue to trim inventories. The July inventory index declined to 45.5 from June’s 46.6. “We have yet to record any restocking of inventories for raw materials and supplies. I expect inventory replenishments in the second half of 2009 to help stimulate the economy,” said Goss.

Other components of the July Business Conditions Index were new orders at 58.3, highest reading since September of 2007, and up from June’s 53.4; production or sales at 58.7, up from June’s 54.0; and delivery lead time at 53.0, up from June’s 51.0.

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 Creighton Economic Forecasting Group uses the same methodology as a national survey by the Institute for Supply Management, formerly the Purchasing Management Association, which has formally surveyed its membership since 1931 to gauge business conditions. 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 sixth straight month, Arkansas’ leading economic indicator increased. July’s Business Conditions Index, based on a survey of supply managers, crawled to a still weak 43.8 from June’s 41.0. Components of the overall index for July were new orders at 43.5, production at 48.7, delivery lead time at 41.6, inventories at 43.0, and employment at 42.2. “I expect the state’s seasonally adjusted unemployment rate to peak at 7.6 percent, its highest level since 1988, in the fourth quarter of this year. Arkansas will continue to bleed manufacturing jobs, both durable and nondurable, in the months ahead. However, the pace of these job losses will diminish significantly from the rate experienced earlier this year,” said Goss.

Iowa: After rising above growth neutral for June, Iowa’s Business Conditions Index once again slipped below 50.0. The index, a leading economic indicator, dipped slightly to 49.8 from June’s 51.2. Components of the overall index for July were new orders at 55.0, production at 49.2, delivery lead time at 51.6, employment at 49.6, and inventories at 43.5. “I expect the Iowa’s seasonally adjusted unemployment rate to peak at 6.5 percent, its highest level since 1986, in the fourth quarter of this year. The state will continue to shed durable goods manufacturing jobs in the months ahead. However, the pace of these job losses will diminish significantly from the rate experienced earlier this year. Employment in Iowa’s nondurable goods sector, including food processing, has stabilized with no job losses expected for the rest of the year,” said Goss.

Kansas: The leading economic indicator for Kansas from a monthly survey of supply managers in the state advanced slightly in July. The July Business Conditions index of 37.3 was up from June’s regional low 29.7. Components of the overall index were new orders at 36.2, production at 34.1, delivery lead time at 49.7, employment at 27.6, and inventories at 39.1. “I expect the state’s seasonally adjusted unemployment rate to peak at 7.4 percent, its highest level since 1982, in the fourth quarter of this year. Kansas will continue to lose durable goods manufacturing jobs, especially in the state’s large aircraft manufacturing sector and for firms with linkages to this sector,” said Goss.

Minnesota: For the 12th consecutive month, Minnesota’s Business Conditions Index fell below growth neutral. The leading economic indicator based on a survey of supply managers, climbed to 45.2 from June’s 43.9. Components of the overall index for July were new orders at 45.4, production at 49.1, delivery lead time at 51.6, inventories at 43.6, and employment at 36.3. “I expect Minnesota’s seasonally adjusted unemployment rate to peak at 8.9 percent, its highest level since 1982, in the fourth quarter of this year. Minnesota will continue to lose jobs, both manufacturing and non-manufacturing, in the months ahead. However, the pace of these job losses will diminish significantly from that experienced earlier this year,” said Goss.

Missouri: For the first time since September 2008, the state’s Business Conditions Index, a leading economic indicator from a monthly survey of supply managers, rose above growth neutral. The index grew to 52.6 from 49.7 in July. Components of the overall index from the July survey were new orders at 61.4, production at 57.4, delivery lead time at 53.5, inventories at 47.8, and employment at 43.0. “I expect the state’s seasonally adjusted unemployment rate to peak at 9.6 percent, its highest level since 1983, in the fourth quarter of this year. The state will continue to lose both manufacturing and non-manufacturing jobs in the months ahead. However, the pace of these job losses will diminish significantly from that experienced earlier this year,” said Goss.

Nebraska: For the first time since August 2008, Nebraska’s Business Conditions Index advanced above growth neutral. The index, a leading economic indicator from a survey of supply managers in the state, climbed to 50.1 from June’s 45.7 and May’s 44.3. Components of the overall index for July were new orders at 58.9, production at 55.6, delivery lead time at 46.0, inventories at 47.6, and employment at 42.4. “I expect Nebraska’s seasonally adjusted unemployment rate to peak at 5.3 percent, its highest level since 1986, in the fourth quarter of this year. I don’t expect manufacturing job losses for the state in the second half of 2009. However, I do expect Nebraska to lose non-manufacturing jobs, albeit at a slower pace, for the rest of 2009,” said Goss.

North Dakota: For the first time since December 2008, North Dakota’s leading economic indicator from a survey of supply managers climbed above growth neutral. The July reading advanced to a regional high of 52.8 from 45.6 in June. Components of the overall index for July were new orders at 56.4, production at 52.1, delivery lead time at 55.4, employment at 51.2, and inventories at 48.9. “North Dakota’s seasonally adjusted unemployment rate peaked at 4.3 percent, its highest level since 1993, in the second quarter of this year. I expect little to no change in the rate of joblessness in the state for the rest of the year. Job losses in manufacturing have been offset by gains in non-manufacturing for 2009. While I do not expect the state to add manufacturing jobs in the second half of the year, my forecast is stability in both manufacturing and non-manufacturing sectors,” said Goss.

Oklahoma: For a second consecutive month, Oklahoma’s leading economic indicator from a monthly survey of supply managers, expanded above growth neutral. The index, termed the Business Conditions Index, dipped slightly to 52.3 from June’s regional high 53.6. Components of July’s overall reading were new orders at 56.3, production at 52.9, delivery lead time at 53.2, inventories at 49.6, and employment at 49.3. “I expect Oklahoma’s seasonally adjusted unemployment rate to peak at 6.5 percent, its highest level since 1992, in the fourth quarter of this year. The state will continue to shed durable goods manufacturing jobs, albeit at a slower pace. On the other hand, the state will experience job stability in nondurable manufacturing and non-manufacturing sectors,” reported Goss.

South Dakota: For the first time since October 2008, South Dakota’s Business Conditions Index rose above growth neutral. The leading economic indicator, based on a survey of supply managers, climbed to 51.8 from June’s 43.6 and well up from May’s 38.9. Components of the overall index for July were new orders at 73.4, production at 62.8, delivery lead time at 43.1, inventories at 34.6, and employment at 45.2. “I expect South Dakota’s seasonally adjusted unemployment rate to peak at 5.4 percent, its highest level since 1983, in the fourth quarter of this year. The state has lost over 7,000 jobs in 2009 with approximately one-third of the losses in manufacturing. While I do expect job losses in the second half of the year, those losses will be significantly down from the first half of the year,” said Goss.

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

www.ernestgoss.com

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