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Mid-America Recession to Deepen in Months Ahead

Mid-America Recession to Deepen in Months Ahead: Deflation in the Pipeline

Ernie Goss MP3
 

December survey results at a glance:

  • Business conditions index plunges to a third straight record low.
  • Region loses jobs for the 11th time in the past 12 months.
  • Inflation gauge indicates deflation in pipeline.
  • Export orders plummet to a record low.
  • North Dakota and Oklahoma only states where leading economic indicators rise above growth-neutral.

Mid-America Recession to Deepen in Months Ahead: Deflation in the Pipeline 

The overall index for the Mid-America region, a leading economic indicator for the nine-state area, plunged to a record low in December. The survey, based on a survey of supply managers in the region, also showed job losses for the 11th time in the past 12 months.

The overall index, or Business Conditions Index, dipped to 33.0 from November’s record low of 37.8. An index of 50.0 is considered growth neutral with December’s reading pointing to a deepening recession for the region during the first portion of 2009.

“For a third straight month, the index plunged to a record low. These readings are consistent with a significant economic downturn. This is stacking up to be the (hurricane) Katrina of economic recessions, similar to what the U.S. experienced in the early 1980s, when the national unemployment rate soared above 10 percent. While I expect the downturn for Mid-America to be a bit less steep, it will nonetheless be deeper than that for 2001,” Creighton University Economics Professor Ernie Goss said today.

The December employment index slipped to a very weak 34.5 from November’s frail 39.0 and October’s weak 47.4. “December’s employment reading was the weakest that we have recorded since we began the study in 1994. Job cuts were recorded across the broad sectors of durable and nondurable manufacturing as well as value-added services. I expect regional job losses to mount in the months ahead with rapidly rising unemployment rates for most states,” said Goss.

Accompanying the economic downturn has been an unrivaled pullback in the regional prices-paid index. The inflation gauge, which tracks the cost of raw materials and supplies, sank to a record low of 33.0, down significantly from November’s 49.6 and October’s 61.6.

“The global economic downturn has produced a very rapid slide in prices. Despite the Federal Reserve’s record cuts in short-term interest rates and increases in the money supply, I expect downturns in oil prices and global economic activity to continue to work their way through the supply chain so that we are likely to record deflation in the first half of 2009,” said Goss.

Goss noted that the Federal Reserve’s targeted-funds rate is now essentially zero, well below that set during the last national economic downturn. When the Federal Reserve’s rate-setting committee meets again at the end of January, he expects it to announce that it will begin to buy long-term U.S. Treasury bonds. “While this action is unprecedented, it will have the impact of reducing mortgage rates even further and assisting the housing sector,” said Goss.

“This move makes sense in the short run but will have negative impacts beyond 2009, when the economy will be dealing with too much inflation. Excessively easy money got us into this; it is certainly not a sound methodology of getting us out of this recession,” said Goss, director of Creighton’s Economic Forecasting Group and the Jack A. MacAllister Chair in Regional Economics.

Looking ahead six months, economic optimism, captured by the confidence index, actually expanded to a still feeble 25.6 from November’s record low of 22.4. Federal Reserve rate cuts and U.S. Treasury bailouts have only reduced the level of business confidence of supply managers in the survey. “A lot of business folks would like to see less panic and more discipline among economic policy makers,” said Goss.

Trade numbers remained very weak for December. Economic weakness among trading partners continues to restrain exports. For a sixth straight month, new export orders plunged with a December reading of 27.5, a new record low, down from November’s record low of 36.8.

The December import index expanded to a still frail 43.8 from November’s record low 38.6. “The global economic slowdown is putting significant downward pressure on exports, just as the U.S. economic recession is curbing imports,” said Goss.

Other components of December’s Business Conditions Index were new orders at 26.8, down from November’s 30.4; production at 29.0, down from 35.4; inventories at 37.3, down from 45.0; and delivery lead time at 47.4, down from 50.2.

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 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 a fourth straight month, the leading economic indicator for Arkansas declined. The December index, based on a survey of supply managers, dipped to 39.8 from 44.0 in November and 53.3 in October. Components of the overall index for December were new orders at 37.0, production at 37.1, delivery lead time at 45.7, inventories at 61.4, and employment at a record low of 32.6,. “Since peaking in February 2008, the state has lost more than 5,000 jobs. A large share of these losses was among durable and nondurable manufacturing firms. I expect these job losses to continue well into 2009. The state’s unemployment rate has risen by half a percentage point over the past two months. I expect the seasonally adjusted jobless rate to rise above 6 percent in first quarter of 2009 with another 4,000 jobs lost by mid-2009,” said Goss.

Iowa: For a seventh straight month, Iowa’s Business Conditions Index, a leading economic indicator, slumped below growth neutral. The index based on a monthly survey of supply managers, dipped to a record low of 30.4, from 36.8 in November and 36.7 in October. Components of the overall index for December were new orders at 19.6, production at 23.9, delivery lead time at 50.0, employment at 39.1, and inventories at 31.8. “Since peaking in August 2008, the state has lost almost 3,000 jobs. A less robust farm economy, the U.S. economic recession and a struggling biofuels industry will place continuing downward pressure on the Iowa economy. I expect Iowa’s seasonally adjusted unemployment rate to rise above 5 percent in the first half of 2009 with another 2,000 jobs lost. Losses will also continue for vehicle-parts suppliers and related firms in Iowa,” said Goss.

Kansas: The Business Conditions Index for Kansas, a leading economic indicator, declined for a third straight month. The December index, based on a survey of supply managers, slipped to 31.1 from November’s 32.7 and October’s much stronger 50.5. Components of the overall index were new orders at 27.3, production at 22.7, delivery lead time at 45.5, employment at 31.8, and inventories at 40.9. “Since peaking in October 2008, Kansas has lost fewer than 1,000 jobs. A weakening transportation equipment-manufacturing sector and lethargic farm income will push the state’s unemployment rate above 5.2 percent (seasonally adjusted) in the first quarter of 2009, with job losses approaching 3,000 by the end of the first quarter. Job losses in the state’s telecommunications industry will continue, albeit at a slower pace,” said Goss.

Minnesota: For the ninth time in 2008, Minnesota’s Business Conditions Index fell below growth neutral. The index, a leading economic indicator, based on a survey of supply managers in the state, dipped to 32.2 from November’s 33.5 and October’s 39.1. Components of the overall index for December were new orders at 23.3, production at 26.8, delivery lead time at 51.9, inventories at 42.1, and employment at 32.5. “Strength in telecommunications was more than offset by very weak business conditions among durable and nondurable manufacturers in the state. Since peaking in March 2008, the state has lost 39,000 jobs. By mid-2009, I expect Minnesota to lose another 15,000 jobs, with the seasonally adjusted unemployment rate approaching seven percent,” said Goss.

Missouri: For a third straight, month Missouri’s Business Conditions Index plummeted below growth neutral. The index, a leading economic indicator, based on a survey of supply managers in the state, dipped to 36.9 from November’s already weak 39.3 and October’s somewhat stronger 48.1. Components of the overall index from the December survey were new orders at 31.6, production at 35.1, delivery lead time at 43.7, inventories at 40.0, and employment at 40.0. “Computer and electronic component manufacturers and firms with linkages to vehicle manufacturing reported negative business conditions for December. Since peaking in October 2007, Missouri has lost almost 24,000 jobs. Based on our surveys, these losses are expected to continue well into 2009 with an additional 10,000 jobs lost and an increase in the state’s unemployment rate of 0.5 percent,” said Goss.

Nebraska: For a fourth consecutive month, Nebraska’s leading economic indicator moved below growth neutral. The December Business Conditions Index, a leading economic indicator, based on a survey of supply managers in the state, edged up to a weak 37.1 from November’s 33.5. Components of the overall index for December were new orders at 27.5, production at 35.6, delivery lead time at 50.4, inventories at 45.2, and employment at 39.6. “Significant pullbacks in business activity were reported by computer and electronic component manufacturers as well as firms with linkages to vehicle manufacturing. Since peaking in August 2008, Nebraska has lost more than 9,000 jobs. Based on surveys over the past few months, I expect the state to lose another 5,000 jobs, with the unemployment rate rising by another 0.5 percent by mid-2009,” said Goss.

North Dakota: North Dakota was one of two states in the region with an economic indicator above growth neutral for December. Even so, the Business Conditions Index, a leading economic indicator, based on a survey of supply managers, slipped to 53.9 from 55.7 in November and 61.1 in October. Components of the overall index for December were new orders at 60.0, production at 56.3, delivery lead time at 56.7, employment at 43.8, and inventories at 46.9. “Even though there are more workers employed in North Dakota than ever before, I expect the national economic recession to weigh on the state in the months ahead. However, it is clear that any pullback will be less significant for North Dakota than for other states. I expect the state’s unemployment rate, which is now the lowest in the region, to expand by 0.2 percent in the first quarter of 2009 with job losses of less than 1,000,” said Goss.

Oklahoma: Oklahoma was one of two states in the region with a Business Conditions Index above growth neutral. The index, a leading economic indicator based on a survey of supply managers in the state, advanced to 51.6 from November’s 40.2. Components of the overall index for December were new orders at 49.3, production at 50.3, delivery lead time at 52.1, inventories at 54.4, and employment at 51.4. “There are more workers employed in Oklahoma than ever before. Much of the recent growth is linked to expansions in mining and natural resources and durable goods manufacturing. This has more than offset weakness among telecommunication firms. While Oklahoma’s economy has clearly avoided the national recession, I expect recent economic strength to dip as the global economic recession weakens the state’s manufacturing sector,” said Goss.

South Dakota: For a third straight month, South Dakota’s Business Conditions Index declined. The index, a leading economic indicator based on a survey of supply managers, slumped to 42.5 from 47.9 in November and 57.3 in October. Components of the overall index for December were new orders at 35.7, production at 40.0, delivery lead time at 59.5, inventories at 38.1, and employment at 45.2. “Recent pullbacks among manufacturing firms in the state pushed the state’s overall index below growth neutral for a second straight month. Since peaking in August 2008, South Dakota has lost almost 3,000 jobs, and its unemployment rate has risen by 0.2 percent. I expect this negative trend to continue, albeit at a slow pace. Based on recent surveys, I expect the state’s seasonally adjusted unemployment rate to approach 4 percent in the first half of 2009,” said Goss.

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