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Leading Economic Indicator Sinks Below Growth Neutral

Leading Economic Indicator Sinks Below Growth Neutral

November survey results at a glance:

  • Business conditions index drops to its lowest level since May.
  • Inflation gauge indicates increasing price pressures in the pipeline.
  • Only 12 percent of firms reported an increase in employment, while 19.5 percent indicated their firms reduced jobs.
  • Over 41 percent of supply managers expect layoffs in the months ahead, and only 48 percent anticipate a pay increase in 2010.
  • Minnesota and Oklahoma were the only states with an increase in leading indicator.

Leading Economic Indicator Sinks Below Growth Neutral for November; Double Dip Recession a Possibility for Region

The November Business Conditions Index for the Mid-America region, a leading economic indicator from a survey of supply managers in a nine-state area, slumped to its lowest level since May of this year. The index stood at 47.5, which was down from October’s 51.8 and September’s much healthier 56.2. An index of 50.0 is considered growth neutral.

“This month’s plunge below growth neutral raises the possibility of a double-dip recession for the region. The significant decline in farm income for 2009 continues to weigh on firms with strong ties to agriculture. For example, agriculture-equipment manufacturers have been hard hit by farmers’ reluctance to purchase new equipment. This downturn has been particularly significant for rural areas of the region,” Creighton University Economics Professor Ernie Goss said today.

After rising to growth neutral for October, the employment index sank to 46.1. “Over the past year, the region’s employment level is down by 400,000, or roughly 3 percent of its jobs. Based on recent survey results, I expect the region to continue to lose jobs with unemployment rates rising slightly. This month, supply managers were asked about possible layoffs at their companies; over 41 percent anticipate that layoffs lie ahead. As a result of the weak labor market, only 48 percent of the supply managers expect to receive pay increases in 2010,” said Goss, director of Creighton’s Economic Forecasting Group and the Jack A. MacAllister Chair in Regional Economics.

Rebounding prices have accompanied job losses for the region. The prices-paid index, which tracks the cost of raw materials and supplies, moved above growth neutral for a sixth straight month to 68.0, down slightly from 68.9 in October. “The weak U.S. dollar is pushing up commodity prices across the board. Our wholesale inflation gauge is pointing to elevated inflation at the consumer level as early as the middle of 2010 in my judgment,” said Goss.

At the Fed’s November meeting, its rate setting board announced that it expects the nation’s inflation rate, excluding food and energy, to decline over the course of the next two years. “Supply managers in our survey think that this outlook is too optimistic. I agree with the supply managers and expect inflationary pressures to rise above the Fed’s acceptable range of 1.75 percent to 2.0 percent by the middle of 2010,” said Goss.

Looking ahead six months, economic optimism, captured by the November confidence index, dipped to a still strong 61.1 from 65.4 in October. “Improvements in the housing market, along with very low interest rates, have lifted the economic outlook of supply managers in the Mid-America region,” said Goss.

Consistent with a weak economy, trade numbers were once again anemic. New export orders inched higher to 50.0 from 49.3 in October, while imports sank to 47.8 from October’s 50.7. “The weaker U.S. dollar that is making imported goods more expensive is contributing to the decline in goods purchased from abroad and rising inflation pressures,” said Goss.

Supply managers in the nine-state region continue to reduce inventories. The November inventory index slipped to 43.6 from October’s 44.4. “This is the 14th straight month that the inventory index has been below growth neutral. Even as business confidence has grown, we have yet to record any restocking of inventories for raw materials and supplies. Any significant re-stocking will be a very positive factor for the regional economy,” said Goss.

Other components of the November Business Conditions Index were new orders at 47.3 down from 53.6 in October; production or sales at 46.7, down from 53.5; and delivery lead time at 53.9, down from 57.9.

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: The Arkansas leading economic indicator declined to its lowest level since April 2009. The Business Conditions Index for November, based on a survey of supply managers, plunged to a very weak 33.1 from October’s 42.6. Components of the overall index for November were new orders at 18.7, production or sales at 17.1, delivery lead time at 53.5, inventories at 39.7, and employment at 35.9. “Arkansas has lost almost 19,000 or 10.2 percent of its manufacturing jobs over the past year. I expect the losses to continue, albeit at a much slower pace, as a cheaper U.S. dollar makes Arkansas-manufactured goods more competitively priced abroad,” said Goss.

Iowa: For a third straight month, Iowa’s Business Conditions Index bounced above growth neutral. The index, a leading economic indicator from a survey of supply managers in the state, slipped to 53.4 from 55.5 in October. Components of the overall index for November were new orders at 58.6, production or sales at 61.7, delivery lead time at 58.9, employment at 46.2, and inventories at 41.4. “Over the past year, Iowa has lost almost 23,000 or 10.1 percent of its manufacturing jobs. However, I expect recent and significant declines in the value of the dollar to stimulate the state’s farm sector and halt manufacturing job losses in the months ahead,” said Goss.

Kansas: The leading economic indicator for Kansas sank from October’s reading. The November Business Conditions Index, based on a survey of Kansas supply managers, stood at 42.1, down from October’s 50.0. Components of the November overall index were new orders at 44.7, production or sales at 42.5, delivery lead time at 41.1, employment at 47.4, and inventories at 40.9. “The global recession and rising productivity have reduced manufacturing employment by more than 25,000 or 13.5 percent over the past year. I expect the pace of these job losses to slow in the months ahead as a cheaper dollar stimulates the sale of Kansas manufactured goods and agricultural commodities abroad,” said Goss.

Minnesota: Minnesota's leading economic indicator, along with Oklahoma’s, were the only ones among the nine states to expand from October. The Business Conditions Index, based on a survey of supply managers, climbed to 57.1 from October’s 55.9. This was the fourth straight month that Minnesota's index has risen above growth neutral, signaling an end to the economic pullback in the state. Components of the overall index for November were new orders at 64.3, production, or sales, at 62.3, delivery lead time at 57.9, inventories at 55.6, and employment at 46.1. “Minnesota’s economy with less reliance on the farm sector, tends to behave more like the national economy. As such, the global recession and rising productivity have reduced manufacturing employment by more than 41,000 or 12.3 percent over the past year. I expect these job losses to halt as the strong growth in new orders translates into a somewhat stronger labor market. Additionally, since the beginning of the year, the U.S. dollar has depreciated by more than 13 percent against the Canadian dollar. I expect the decline to continue and stimulate the sale of Minnesota products to its major trading partner in the months ahead,” said Goss.

Missouri: For the fifth consecutive month, Missouri’s Business Conditions Index remained above growth neutral. Even so, the index slipped to 50.6 from 53.4 in October. Components of the overall index from the November survey were new orders at 51.1, production at 53.7, delivery lead time at 54.3, inventories at 44.9, and employment at 49.1. “The global recession and rising productivity have reduced manufacturing employment by more than 24,000 or 8.5 percent over the past year. I expect these job losses to halt as recent strong growth in new orders translates into a stabilizing and even improving job market,” said Goss.

Nebraska: For a third consecutive month, Nebraska’s Business Conditions Index, a leading economic indicator, remained above growth neutral. The November reading, based on a survey of supply managers, slipped to 50.6 from October’s 51.6. Components of the overall index for November were new orders at 50.5, production or sales at 52.1, delivery lead time at 54.8, inventories at 41.8, and employment at 53.8. “The global recession and rising productivity have reduced manufacturing employment in the state by more than 10,000 or 10.2 percent over the past year. I expect these job losses to halt as the global economic rebound and a weaker U.S. dollar stimulates sales abroad,” said Goss.

North Dakota: For the first time since June, North Dakota’s leading economic indicator slipped below growth neutral. The November reading, based on a survey of supply managers, dipped to 48.4 from October’s 53.9. Components of the overall index for November were new orders at 36.4, production or sales at 46.8, delivery lead time at 55.9, employment at 50.0, and inventories at 58.3. “Even though North Dakota’s economy has been shielded from the national and regional recession, the state has lost almost 3,000 manufacturing jobs or 11.0 percent over the last year. A weaker U.S. dollar against Canadian currency will be an important stimulant in the months ahead,” said Goss.

Oklahoma: For a third straight month, Oklahoma’s leading economic indicator from a monthly survey of supply managers dropped below growth neutral. The Business Conditions Index, expanded to a tepid 49.4 from October’s 46.9. Components of November’s overall reading were new orders at 45.6, production or sales at 47.8, delivery lead time at 55.5, inventories at 48.8, and employment at 49.3. “The global recession and rising productivity have reduced manufacturing employment in the state by almost 17,000 or 11.3 percent over the past year. I expect these job losses to halt as the global economic rebound and a weaker U.S. dollar encourages sales abroad,” said Goss.

South Dakota: For the fourth time in the past five months, South Dakota’s leading economic indicator climbed above growth neutral. The index, based on a survey of supply managers, dipped to 50.2 from 55.5 in October. Components of the overall index for November were new orders at 67.7, production or sales at 57.8, delivery lead time at 47.9, inventories at 32.8, and employment at 45.1. “The global recession and rising productivity have reduced manufacturing employment in the state by more than 5,000 or 12.0 percent over the past year. I expect these job losses to halt as the global economy rebounds and a weaker U.S. dollar stimulates sales abroad,” said Goss.

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

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