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Leading Economic Indicator Drops for First Time Since January

Audio Summary

August survey results at a glance:

  • Business conditions index declines for first time since January, moving below growth neutral.
  • Inflation gauge indicates rising price pressures in the pipeline.
  • Only 9 percent of firms report positive impacts from the 2009 stimulus package.
  • Region continues to lose jobs. More than 250,000 jobs were lost in 2009.

Leading Economic Indicator Drops for First Time Since January: Job Losses and Inflation Accompany Pullback

The August Business Conditions Index for the Mid-America region, a leading economic indicator from a survey of supply managers in a nine-state area, declined for the first time since January of this year, according to the latest survey results.

The overall index sank to 48.4 from July’s 51.7 and June’s 49.3. An index of 50.0 is considered growth neutral. “This month’s decline is a real surprise and combined with readings over the past several months points to an economic recovery that is much more fragile than I anticipated. Compared to the recovery from the 2001 recession, the current rebound appears to be much more subdued. It is clear that the significant pullback in farm income is producing negative impacts on businesses that we survey that have ties to this sector,” Creighton University Economics Professor Ernie Goss said today.

The August employment index inched higher to a still weak 44.2 from 43.0 in July. “On an annualized basis, government data shows that the region has lost jobs at a 1.5 percent pace over the past three months. Our survey indicates that the rate of job losses will diminish in the months with only slightly higher unemployment rates for much of the region. I think the worst of the job losses are behind us. However, job gains are not in the picture for the near term,” 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 third straight month to 66.9 from July’s 61.5 and June’s 52.5. “We are recording increasing signs 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.

“Surveys over the past several months are pointing to a weak economic rebound with elevated inflationary pressures in the months ahead. The Fed is now sandwiched between a very weak job market and rising inflationary pressures in the pipeline. I expect the Fed to raise short term interest rates or pullback on their purchases of mortgage back securities before the end of 2009. The Fed has got to prepare markets for a reduction in this record monetary stimulus, or risk allowing inflation to get out of control,” said Goss.

Looking ahead six months, economic optimism, captured by the August confidence index, advanced to a strong 63.1 from July’s 62.8. “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. However, at the same time these same factors have contributed to upward pressures on prices,” said Goss.

Trade numbers for August were not good and are consistent with a very weak economic rebound. “Despite an upturn in the regional economy off the lows experienced earlier in the year, imports dipped to 47.5 from July’s 52.8. At the same time, new export orders declined to a frail 44.7 from July’s 45.1,” said Goss.

Supply managers in the nine-state region continue to trim inventories. The August inventory index declined to 39.8 from 45.5 in July. “This is the 11th straight month that the inventory index has dipped below growth neutral. We have yet to record any restocking of inventories for raw materials and supplies. Compared to the 2001 recession, companies have been much more vigilant in reducing inventories. However, I expect inventory replenishments in the final quarter of 2009 to help stimulate the regional economy,” said Goss.

Other components of the August Business Conditions Index were new orders at 50.0, down from July’s 58.3; production or sales at 53.0, down from July’s 58.7; and delivery lead time at 54.9, up from July’s 53.0.

This month supply managers were asked for their their assessment of the 2009 federal stimulus package. Less than one in ten, or 9 percent, indicated that their firm has experienced positive impacts.

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 first time since January of this year, Arkansas’ leading economic indicator declined. The Business Conditions Index for August, based on a survey of supply managers, plunged to 36.0 from July’s 43.8 and June’s 41.0. Components of the overall index for August were new orders at 20.0, production at 30.1, delivery lead time at 30.0, inventories at 50.0, and employment at 30.0. “Weakness was recorded by both durable and nondurable manufacturing firms in the state. However, Arkansas’ business confidence index was a healthy 63.1 for August,” said Goss.

Iowa: After rising above growth neutral for June, Iowa’s Business Conditions Index slipped below growth neutral for July and August. The index, a leading economic indicator, slipped to 48.9 from July’s 49.8 and June’s 51.2. Components of the overall index for August were new orders at 44.5, production at 50.0, delivery lead time at 72.2, employment at 50.0, and inventories at 27.8. “The downturn in farm income is having a significant and negative impact on firms across the state, especially for agriculture equipment manufacturers. Nondurable goods producers in the state reported positive business activity for August in the state,” said Goss.

Kansas: The leading economic indicator for Kansas from a monthly survey of supply managers in the state expanded in August. The August Business Conditions index was up at 41.0 from July’s 37.3 and June’s regional low 29.7. Components of August’s overall index were new orders at 30.0, production at 30.2, delivery lead time at 75.0, employment at 29.9, and inventories at 40.0. “Last month, I projected that the state’s unemployment rate would peak at 7.4 percent. I now think I was too optimistic with the rate likely to top out at 7.8 percent. August business activity in Kansas was very weak for heavy manufacturers and telecommunications firms in the state. Weak exports are hammering the state’s durable goods sector,” said Goss

Minnesota: Minnesota’s Business Conditions Index soared to its highest level since June 2007. The leading economic indicator, based on a survey of supply managers, climbed to 58.0, a regional high, from July’s 45.2 and June’s 43.9. Components of the overall index for August were new orders at 65.0, production at 60.0, delivery lead time at 65.0, inventories at 55.0, and employment at 45.0. “Upturns among nondurable goods firms more than offset weakness in the state’s durable goods sector. Telecommunications firms continue to report weaker economic activity. Supply managers were very positive with an August business confidence index of 70.0,” said Goss.

Missouri: For the second consecutive month, Missouri’s Business Conditions Index, a leading economic indicator from a monthly survey of supply managers, was above growth neutral. The index dipped slightly to 52.0 from July’s 52.6. Components of the overall index from the August survey were new orders at 65.8, production at 60.5, delivery lead time at 52.8, inventories at 38.9, and employment at 42.1. “While the state’s economy is on the mend, the rebound is fragile with durable and nondurable manufacturing firms reporting modest expansions in economic activity. Vehicle manufacturing is looking much more positive than in prior months,” said Goss.

Nebraska: After moving above growth neutral in July, Nebraska’s Business Conditions Index once again slumped below 50.0. August’s reading of 46.4 represented the 12th time in the past 13 months that the state’s leading economic indicator slipped below growth neutral. Components of the overall index for August were new orders at 43.2, production at 50.0, delivery lead time at 45.7, inventories at 43.2, and employment at 50.0. “Firms with close ties to agriculture are experiencing significant pullbacks in economic activity. Both durable and nondurable goods producers reported downturns in business activity for August. New export orders stood at a less than healthy 42.3 for August,” said Goss.

North Dakota: For a second straight month, North Dakota’s leading economic indicator from a survey of supply managers climbed above growth neutral. The August reading advanced to 53.3 from 52.8 in July. Components of the overall index for August were new orders at 50.0, production at 66.7, delivery lead time at 50.0, employment at 66.7, and inventories at 33.4. “Strength among nondurable goods producers more than offset weakness in North Dakota’s durable goods sector. The economic outlook among the state’s supply managers as measured by the business confidence index was a surprisingly low 50.0 for August,” said Goss.

Oklahoma: For the first time since May of this year, Oklahoma’s leading economic indicator from a monthly survey of supply managers, dropped below growth neutral. The Business Conditions Index, declined to 45.0 from July’s 52.3 and June’s regional high 53.6. Components of August’s overall reading were new orders at 50.0, production at 50.2, delivery lead time at 66.6, inventories at 25.0, and employment at 33.4. “Solid business activity among nondurable manufacturing firms more than offset August downturns among durable goods producers in the state. Both imports and exports stood at a growth neutral 50.0,” said Goss.

South Dakota: After rising above growth neutral for July, South Dakota’s Business Conditions Index slumped below growth neutral. The leading economic indicator, based on a survey of supply managers, sank to 48.6 from July’s 51.8 but was up from June’s 43.6. Components of the overall index for August were new orders at 57.1, production at 71.4, delivery lead time at 42.9, inventories at 28.6, and employment at 42.9. “Lower farm income is negatively affecting firms with close ties to agriculture. Durable goods producers reported pullbacks in business activity. Despite lower August readings, supply mangers were very optimistic regarding future economic activity with an August business confidence index of 71.5,” said Goss.

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

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