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Leading Economic Indicator for Mid-America Economy Not As Weak

Leading Economic Indicator for Mid-America Economy Not As Weak

May survey results at a glance:

  • Business conditions index rises for fifth straight month but remains below growth neutral.

  • Region loses jobs for the 16th time in past 17 months.
  • Two-thirds of supply managers are opposed to providing taxpayer relief for GM.
  • Economic confidence index soars to highest level in more than 4 years.

Leading Economic Indicator for Mid-America Economy Not As Weak: Business Confidence Index Highest in Four Years

The May overall index for the Mid-America region, a leading economic indicator from a survey of supply managers for the nine-state area, expanded for a fifth straight month but remained below growth neutral. While the index reached its highest level since September of last year, the reading points to a continuation of the regional economic slowdown at least until the end of the third quarter of 2009.

The overall index, or Business Conditions Index, climbed to 46.6 from April’s 42.7 and March’s 39.7. “An index of 50.0 is considered growth neutral. Thus readings over the past several months indicate that the regional economy has bottomed out. However, little in the May survey points to an economic turnaround in the next three to six months,” Creighton University Economics Professor Ernie Goss said today.

“While our survey is not indicating an economic turnaround for the next three to six months, economic indictors are certainly improving from record lows achieved earlier this year. I continue to expect the Mid-America economy to be out of a recession by the end of the fourth quarter of this year,” said Goss, director of Creighton’s Economic Forecasting Group and the Jack A. MacAllister Chair in Regional Economics.

The May employment index unexpectedly declined to 40.5 from April’s weak 41.4. “The region is now matching the nation in the pace of job losses. Over the past three months, the region lost jobs at an annualized rate over five percent. Even as the regional economy has bottomed out, the rate of job losses will likely continue on a negative pace with rising unemployment rates for most states in the region. While the regional economy will move out of recession territory in the last quarter of 2009, I do not expect job gains of any significance until well into 2010,” said Goss.

Despite record low interest rates and expanding federal spending, the region’s inflation gauge continues to point to deflation in the supply pipeline. The prices-paid index, which tracks the cost of raw materials and supplies, advanced to 39.3 from April’s 34.2. “As the economy has moved off the depths experienced earlier in the year, cuts in input prices have likewise moderated a bit. Even so, these price trends, which match those at the national level, allow the Federal Reserve (Fed) to maintain its aggressive interest rate policies with little fear of inflation in the near term,” said Goss.

“The Fed interest rate setting committee, the FOMC, meets next on June 23 for two days. I expect no changes in the current funds rate of 0 percent to 0.25 percent, its lowest level since the Federal Reserve was created in 1913. However given the notable increase in long-term interest rates over the past several months, I expect the Fed to raise short-term rates before the end of the 2009. I expect this move will be too late to thwart excessive inflation surfacing in 2010. However at this point in time, this is a terrific time to borrow for businesses and individuals with solid credit scores,” said Goss.

Looking ahead six months, economic optimism, captured by the May confidence index, reached its highest level since February 2005. The index expanded to 65.9 from 61.4 in April and well up from last November’s record low 22.4. “Very low interest rates, both short-term and long-term, and the federal stimulus package have clearly buoyed the economic outlook of supply managers in the Mid-America region. Even the Chrysler bankruptcy and the impending GM bankruptcy have failed to derail economic optimism,” said Goss.

This month, business buyers were asked about their view of the provision of taxpayer relief for GM. Almost two-thirds of the survey participants, 66 percent, were opposed to the bailout with only 16 percent supporting the current approach of President Barrack Obama’s administration.

As in previous months, trade numbers were not good. “The global recession has negatively affected both exports and imports. Nonetheless, new export orders advanced to a weak 44.9 from 42.4 in April. The recession continues to place downward pressure on imports. May’s import index stood at 48.2, but up from April’s 44.0,” said Goss.

Supply managers in the nine-state region continue to trim inventories. The May inventory index was 39.3, up from April’s record low 36.2. “We have yet to record any restocking of inventories for raw materials and supplies. However, I expect replenishment of inventory levels later this year to have strong positive impacts on the regional economy,” said Goss.

Other components of the May Business Conditions Index were new orders at 55.1, up substantially from 43.0 in April; production at 51.0, up from 42.8; and delivery lead time at 46.8, down from 50.0.

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 fourth straight month, Arkansas’ leading economic indicator increased. May’s Business Conditions Index, based on a survey of supply managers, rose to a still weak 35.2 from April’s 33.0 and March’s regional low 29.6. Components of the overall index for May were new orders at 24.2, production at 28.3, delivery lead time at 49.6, inventories at 38.7, and employment at 35.4. “Economic conditions appear to be stabilizing for durable goods producers at the same time nondurable goods manufacturers report continuing business weakness. Construction activity has yet to rebound in Arkansas,” said Goss.

Iowa: For the 12th straight month, Iowa’s Business Conditions Index was below growth neutral. The index, a leading economic indicator, climbed to 48.3 from March’s 42.7 and was up dramatically from January’s record low 22.3. Components of the overall index for May were new orders at 50.2, production at 46.9, delivery lead time at 48.8, employment at 51.4, and inventories at 44.4. “May’s new orders and employment readings were very encouraging. Our survey, combined with Bureau of Labor Statistics survey data, indicate that the negative indicators have become much less negative over the past several months,” said Goss.

Kansas: The last time the Kansas Business Conditions Index rose above growth neutral was October of last year. The May leading economic indicator index dipped to a frail 30.2 from 30.9 in April. Components of the overall index were new orders at 32.3, production at 24.0, delivery lead time at 36.5, employment at 27.1, and inventories at 31.2. “The downturn in exports for durable goods, especially for big ticket items like aircraft, has significantly weakened the Kansas economy. Nondurable goods producers in Kansas report stabilizing but weak business conditions for the next few months,” said Goss

Minnesota: For the 10th consecutive month, Minnesota’s Business Conditions Index fell below growth neutral. The leading economic indicator based on a survey of supply managers, slipped to 42.0 from 42.6 in April. Components of the overall index for May were new orders at 50.2, production at 46.4, delivery lead time at 46.7, inventories at 33.3, and employment at 33.3. “The Minnesota economy has lost almost 60,000 jobs in 2009 alone. Our survey of supply managers in the state points to a continuation of job losses. Companies report delaying and even terminating construction projects over the past several months. Minnesota’s unemployment rate will continue to trend upward in the months ahead,” said Goss.

Missouri: For the eighth straight month, Missouri’s Business Conditions Index sank below growth neutral. The index grew to a still weak 47.3 from April’s 46.9 and well up from February’s record low 30.3. Components of the overall index from the May survey were new orders at 53.0, production at 51.3, delivery lead time at 51.8, inventories at 40.1, and employment at 40.3. “As in past months, the state’s large heavy manufacturing sector continues to experience weak economic conditions. On the other hand, nondurable goods producers reported improving economic conditions. Obviously the speed and success of bankruptcy proceedings among auto manufacturers will have a large impact on the Missouri economy in the months ahead,” said Goss.

Nebraska: For the ninth consecutive month, Nebraska’s leading economic indicator was below growth neutral. The May Business Conditions Index climbed to 44.3 from April’s 39.8. Components of the overall index for May were new orders at 47.6, production at 46.6, delivery lead time at 44.3, inventories at 42.0, and employment at 41.1. “Business activity in Nebraska was weak for durable and nondurable goods manufacturers in the state. Nebraska was on pace to lose almost five percent of its jobs this year. However, the pace of job losses is likely to slow significantly in the months ahead,” said Goss.

North Dakota: For the fifth straight month, North Dakota’s leading economic indicator from a survey of supply managers sank below growth neutral. The May reading expanded to 41.3 from 35.8 in April. Components of the overall index for May were new orders at 31.3, production at 42.7, delivery lead time at 52.1, employment at 50.0, and inventories at 30.2. “While business activity has weakened for durable and nondurable goods producers, truckers reported upturns in shipments tied to farm and energy commodities,” said Goss.

Oklahoma: For the fifth straight month, Oklahoma’s leading economic indicator was below growth neutral. The index, from a survey of supply managers, rose to 47.3 from April’s 31.3. Components of May’s overall reading were new orders at 57.3, production at 47.9, delivery lead time at 53.1, inventories at 55.2, and employment at 22.9. “Lower energy commodity prices over the past several months are negatively affecting the state’s large mining and natural resources industry. Downturns among durable goods producers, particularly those tied to vehicle manufacturing, have weakened Oklahoma’s economy,” said Goss.

South Dakota: For the seventh straight month, South Dakota’s Business Conditions Index slumped below growth neutral. The leading economic indicator, based on a survey of supply managers, inched up to a weak 38.9 from April’s 35.0. Components of the overall index for May were new orders at 51.8, production at 42.9, delivery lead time at 39.3, inventories at 21.5, and employment at 39.3. “South Dakota was losing jobs at a pace approaching five percent for the first five months of 2009. I expect this pace to slow in the months ahead. Mining firms and companies with links to energy production continue to report pullbacks in economic activity,” said Goss.

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

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