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Leading Economic Indicator Soars for September

Leading Economic Indicator Soars for September

Audio Summary

September survey results at a glance:

• Business Conditions Index climbs to its highest level in two years.
• Inflation gauge indicates heightened price pressures in the pipeline.
• Employment index moves above growth neutral for the first time since March 2008.
• Regarding a public option for health insurance coverage, 22 percent support such an option while 59 percent oppose it.

Leading Economic Indicator Soars for September: Inflation Gauge Rises for Fifth Straight Month

The September Business Conditions Index for the Mid-America region, a leading economic indicator from a survey of supply managers in a nine-state area, soared to its highest level in two years, according to the latest survey results.

The overall index rose to 56.2 from August’s 48.4. An index of 50.0 is considered growth neutral.

“This month’s large bounce is a welcome surprise and further evidence that the economic recovery is underway. However, the volatility of the index over the past several months points to the fragility of the economic upturn. Additionally, it is clear from comments from purchasing managers in farm dependent areas that the pullback in farm income is negatively affecting the agricultural areas of the region,” Creighton University Economics Professor Ernie Goss said today.

The September employment index rose above growth neutral for the first time since March 2008 to 52.1 from 44.2 in August and 43.0 in July. “Since September of last year, government data has shown that the region has lost almost 400,000 jobs, or 3 percent, of regional employment. Our survey indicates that the rate of job losses will diminish in the months ahead. I think the worst of the job losses are behind us for most states in the region. However, any job gains are likely to be very modest until well into 2010,” 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. Supply managers are reporting heightened inflationary pressures as the prices-paid index, which tracks the cost of raw materials and supplies, moved above growth neutral for a fourth straight month to 68.1 from August’s 66.9 and July’s 61.5.

“Surveys over the past several months are pointing to a recovering economy with elevated inflationary pressures in the months ahead. In its last meeting the Fed announced it would soon reduce purchases of mortgage-backed securities. I think this action was too modest to avoid a spike in inflation in 2010. I believe the Fed will have to raise short-term interest rates no later than its January 2010 meeting. In my judgment, this action will be too late to avoid inflation above the Fed’s target of 1.75 percent to 2.0 percent. While it is too early to get concerned about 1980’s-like inflation, the Fed’s current policy will contribute to unacceptably high inflation in 2010,” said Goss.

Looking ahead six months, economic optimism, captured by the September confidence index, advanced to a very strong 73.4 from August’s robust 63.1. “Very low interest rates, both short-term and long-term, and a slowly improving housing market have clearly lifted the economic outlook of supply managers in the Mid-America region. This is the first time since the recession began that positive reports of current economic conditions have mirrored the positive outlook,” said Goss.

Compared to previous months, trade numbers for September were very healthy and consistent with an economic rebound. New export orders climbed to 54.6 from August’s 44.7, while imports grew to 56.0 from August’s 47.5.

Supply managers in the nine-state region continue to trim inventories, albeit at a slower pace. The September inventory index rose to 43.5 from August’s 39.8. “This is the 12th straight month that the inventory index has been below growth neutral. Even with an improving economy, we have yet to record any restocking of inventories for raw materials and supplies. Companies have been very vigilant in reducing inventories to levels significantly below my expectations. I do expect inventory replenishments in the final quarter of 2009 to further stimulate the regional economy,” said Goss.

Other components of the September Business Conditions Index were new orders at 64.5, up from 50.0 in August; production or sales at 66.0, up from 53.0; and delivery lead time at 54.8, down slightly from 54.9.

This month supply managers were asked whether they supported a public option for health insurance as part of healthcare reform. Only 22 percent supported the option while 59 percent opposed it.

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: Arkansas’ leading economic indicator has expanded for six of the last eight months. The Business Conditions Index for September, based on a survey of supply managers, increased to a still weak 41.2 from August’s frail 36.0. Components of the overall index for September were new orders at 34.6, production at 38.4, delivery lead time at 54.1, inventories at 42.0, and employment at 36.8. “Over the past year, Arkansas has lost 28,000 jobs, or 2.3 percent of its nonfarm employment. Due to discouraged unemployed workers leaving the workforce, the state’s unemployment rate dropped to 7.1 percent for August. Based on our surveys over the past several months, I expect the state’s jobless rate to rise to 7.5 percent by the end of 2009,” said Goss.

Iowa: After falling below growth neutral for August, Iowa’s Business Conditions Index bounced above 50 for September. The index, a leading economic indicator from a survey of supply managers, increased to 52.9 from 48.9 in August. Components of the overall index for September were new orders at 56.7, production at 56.6, delivery lead time at 58.2, employment at 52.2, and inventories at 40.5. “Over the past year, Iowa has lost almost 50,000 jobs, or 3.2 percent of its nonfarm employment. I expect job losses to cease in the months ahead with a decline in the state’s unemployment rate by 0.2 percent by the end of 2009. Durable goods producers, other than those linked to agriculture, are experiencing improving economic conditions,” said Goss.

Kansas: The leading economic indicator for Kansas from a monthly survey of supply managers expanded in September. The September Business Conditions index, based on a survey of supply managers in the state, surged to 50.0 from August’s 41.0. Components of September’s overall index were new orders at 54.0, production at 53.5, delivery lead time at 64.5, employment at 39.4, and inventories at 38.5. “Over the past year, Kansas has lost almost 51,000 jobs, or 3.7 percent of its nonfarm employment. Due to discouraged unemployed workers leaving the labor force, the state’s unemployment rate dropped to 7.1 percent for August. Based on our surveys over the past several months, I expect the jobless rate to rise by 0.4 percent by the end of 2009 even as job losses halt,” said Goss.

Minnesota: Minnesota’s leading economic indicator continues to point to improving economic conditions in the months ahead. The Business Conditions Index dipped to a still healthy 55.4 from August’s 58.0. Components of the overall index for September were new orders at 66.0, production, or sales, at 58.1, delivery lead time at 59.9, inventories at 49.7, and employment at 43.4. “Over the past year, Minnesota has lost more than 120,000 jobs, or 4.4 percent of its nonfarm employment. Due in part to discouraged unemployed workers leaving the workforce, the state’s unemployment rate dropped to 8.0 percent for August. Based on our surveys over the past several months, I expect the job outlook to improve in the months ahead. This will stimulate the discouraged to enter the job search process and will cause the state’s jobless rate to rise by 0.3 percent by the end of 2009, even as the employment outlook improves,” said Goss.

Missouri: For the third consecutive month, Missouri’s Business Conditions Index, a leading economic indicator from a monthly survey of supply managers, climbed above growth neutral. The index increased to 53.7 from August’s 52.0. Components of the overall index from the September survey were new orders at 64.4, production at 65.4, delivery lead time at 50.5, inventories at 42.3, and employment at 46.2. “Over the past year, Missouri has lost more than 80,000 jobs, or 2.9 percent of its nonfarm employment. In August, according to Bureau of Labor Statistics data, Missouri’s unemployment rate rose to a regional high of 9.5 percent. Based on our surveys over the past several months, I expect the job outlook to improve in the months ahead. This will stimulate the discouraged unemployment to once again enter the job search process. This will cause state’s jobless rate to rise by another 0.2 percent by the end of 2009 even as the employment outlook improves,” said Goss.

Nebraska: After slipping below growth neutral in August, Nebraska’s Business Conditions Index, a leading economic indicator, climbed above growth neutral. The September reading based on a survey of supply managers expanded to 52.5 from August’s 48.2. Components of the overall index for September were new orders at 55.5, production at 58.4, delivery lead time at 49.6, inventories at 44.7, and employment at 54.1. “Over the past year, Nebraska has lost more than 13,000 jobs, or 2.9 percent of its nonfarm employment. While I expect no additional job losses for 2009 for the state, the unemployment rate is likely to rise slightly, or 0.2 percent, as some of the unemployed that left the labor force, once again begin their job search and get counted among the jobless,” said Goss.

North Dakota: For a third straight month, North Dakota’s leading economic indicator from a survey of supply managers climbed above growth neutral. The September reading expanded to 57.8 from 53.3 in August. Components of the overall index for September were new orders at 45.7, production at 70.4, delivery lead time at 61.1, employment at 62.5, and inventories at 49.8. “North Dakota is the only state in the region to gain jobs over the past year. Even while the overall economy in North Dakota has performed well, the state’s manufacturing sector has experienced weak economic conditions. I expect North Dakota’s manufacturing sector to benefit from expanding exports in the months ahead,” said Goss.

Oklahoma: After declining below growth neutral for August, Oklahoma’s leading economic indicator from a monthly survey of supply managers rose above growth neutral. The Business Conditions Index increased to 52.9 from 45.0 in August. Components of September’s overall reading were new orders at 53.2, production at 56.2, delivery lead time at 56.3, inventories at 44.5, and employment at 54.2. “Over the past year, Oklahoma has lost almost 43,000 jobs, or 2.7 percent of its nonfarm employment. Based on our surveys over the past several months, I expect the pace of job losses to slow significantly in the months ahead. Even while Oklahoma’s economy improves in the months ahead, I expect the state’s unemployment rate to top 7.0 percent before the end of the year,” said Goss.

South Dakota: For a second month in the past three, South Dakota’s leading economic indicator climbed above growth neutral. The index based on a survey of supply managers surged to 58.1 from 48.6 in August and 51.8 in July. Components of the overall index for September were new orders at 82.6, production at 83.6, delivery lead time at 41.5, inventories at 35.8, and employment at 47.0. “Over the past year, South Dakota has lost almost 6,000 jobs, or 1.3 percent of its nonfarm employment. While I expect no additional job losses for 2009, the state’s unemployment rate will top 5.0 percent before the end of the year as some of the unemployed that left the labor force, once again begin their job search and get counted among the jobless,” said Goss.

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

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