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Mid-America Leading Economic Indicator Healthy

Mid-America Leading Economic Indicator Healthy

June survey results at a glance:

  •  Leading economic indicator slips, but remains at a healthy level.
  • Inflation gauge takes biggest one-month plunge since October 2008.
  • Over the past six months, the percentage of supply managers expecting a yearly pay reduction increased.
  • Export orders rose to highest level since beginning of the recession in December 2007.

Mid-America Leading Economic Indicator Healthy:
Exports Fueling Expansion

The Business Conditions Index for the Mid-America region dipped slightly to a still healthy level, pointing to an expanding regional economy in the months ahead, according to the June Business Conditions survey of supply managers in the nine-state region.

The index slipped to 62.5 from 64.2 in May. An index of 50.0 is considered growth neutral for the leading economic indicator. This was the seventh straight month that the index has risen above growth neutral, signaling a healthy economic recovery for the regional economy in the months ahead.

“While there remains weakness in the consumer sector, our survey of manufacturers and value-added service companies over the past several months signals very positive growth for the regional economy into the fourth quarter of this year. The financial turmoil in Europe has been a real concern for the Federal Reserve’s Open Market Committee, which sets interest rates. Our survey indicates that the European problems are having little impact on business expansion in this part of the country. The economic turmoil in Europe has increased the value of the dollar, which has made U.S. manufactured goods and farm products less competitive abroad but is being more than offset by expansions elsewhere,” Creighton University Economics Professor Ernie Goss said today.

For a sixth straight month, the regional employment index remained above growth neutral, though the June job reading sank to 58.3 from May’s 60.1. This month, 30.4 percent of businesses reported an increase in employment levels while only 13.9 percent indicated that their employment levels had declined from May.

Even though the hiring picture has improved, the pay outlook has not. “The percentage of supply managers expecting a pay reduction for the next year rose from 1 percent in January to 6 percent in June,” said Goss. “

Despite improved hiring, the region’s employed work force is down by 452,000 since the beginning of the recession, a 3.5 percent job loss. This compares to a loss of 5.4 percent of all U.S. jobs. Even though the region will continue to add jobs, I expect unemployment rates for most states in the region to remain at elevated levels as firms remain overly cautious about hiring new workers. Cap-and-trade, health care reform, rising taxes and European economic turmoil are all generating significant caution among businesses in the region, ” said Goss, director of Creighton’s Economic Forecasting Group and the Jack A. MacAllister Chair in Regional Economics.

The prices-paid index, which tracks the cost of raw materials and supplies, plunged to 68.8 from May’s 80.0, but remained above growth neutral for a 13th straight month.

“This is the largest one-month drop in our inflation gauge since October 2008. However, surveys over the past several months indicate that it is too early to ignore the potential for elevated inflation pressures. Record-low interest rates from the Federal Reserve, combined with record federal government deficit spending, are creating price bubbles in various commodities and will, in my judgment, ultimately contribute to inflationary pressures at the consumer level – above the Fed’s goal of 1.75 percent to 2 percent. Even so, I do not think the Fed will begin raising interest rates before the last quarter of this year,” said Goss.

Looking ahead six months, economic optimism, captured by the June confidence index, slumped to 59.4 from May’s 69.0 and April’s 72.9. “It is clear supply managers are becoming less confident about the economy six months down the road,” said Goss.

Despite a stronger dollar, an improving global economy continues to push exports higher. The June new export orders index advanced to 60.9, its highest level since December 2007, and up from May’s 59.0. Supply managers reported a slower pace of growth in imports with a June index of 54.9, compared to May’s 63.2.

For a fifth consecutive month, supply managers in the nine-state region increased inventory levels. The June inventory index expanded to 55.1 from 54.6 in May. “The growth in inventories has been a positive and significant factor pushing the regional economy higher. However, we need to see an increase in the pace of consumer buying before we can be assured that the economy will not dip back into a recession. Inventory buildups are not the basis for sustained economic growth. This month supply managers were asked about expected changes in inventory levels in the months ahead. Almost one-third, or 32 percent, anticipate increases in inventory levels, while 22 percent expect inventory declines. This is certainly not indicative of an economic pullback,” said Goss.

Other components of the June Business Conditions Index were new orders at 67.0, down from May’s 72.4; production or sales at 70.6, down from 72.2; and delivery lead time at 61.4, down from 62.1.

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, based on a survey of supply managers, continues to point to growth in the months ahead. The Arkansas Business Conditions Index for June slipped to 55.9 from 56.8 for May. Components of the overall index for June were new orders at 60.2, production or sales at 56.7, delivery lead time at 63.4, inventories at 50.1, and employment at 49.2. “We are tracking a definite improvement in the Arkansas economy. Durable goods manufacturing, particularly firms tied to international markets, have experienced very positive results of late. I expect recent rapid increases in hours worked by current workers to translate into new hiring in the months ahead,” said Goss.

Iowa: For the sixth straight month, Iowa’s Business Conditions Index was above growth neutral. The index, a leading economic indicator from a survey of supply managers, dipped to a regional high 70.1 from May’s 70.3. Components of the overall index for June were new orders at 87.0, production or sales at 83.3, delivery lead time at 59.2, employment at 62.3, and inventories at 58.9. “Durable goods manufacturers are experiencing very strong growth while nondurable goods producers are reporting somewhat slower activity. Firms in the state have delayed hiring by increasing the hourly work week significantly over the past several months,” said Goss.

Kansas: The leading economic indicator for Kansas declined for the first time since October 2009. The June Business Conditions Index declined to 51.1 from May’s 62.3 and April’s 62.1. Components of the overall index for June were new orders at 50.5, production, or sales, at 48.2, delivery lead time at 68.0, employment at 43.8, and inventories at 45.2. “Both nondurable and durable goods producers continue to report healthy growth in activity. However, the stronger U.S. dollar will have some negative impacts on firms selling abroad, especially in Europe in the months ahead,” said Goss.

Minnesota: Minnesota’s leading economic indicator, based on a survey of supply managers, continues to point to advancing economic conditions ahead. The Business Conditions Index climbed to 65.5 from May’s 64.1 and April’s healthy 62.4. This was the 11th straight month that Minnesota's index has risen above growth neutral. Components of the overall index for June were new orders at 68.1, production, or sales, at 70.6, delivery lead time at 66.1, inventories at 55.1, and employment at 67.5. “While both durable and nondurable goods manufacturers are reporting very healthy economic activity, nondurable producers, especially those tied to international markets, are experiencing upturns in overall business gains. Average weekly hours worked by workers in manufacturing has been growing over the past several months,” said Goss.

Missouri: For the 12th straight month, Missouri’s Business Conditions Index climbed above growth neutral. The index from a survey of supply managers slipped to a still vigorous 58.5 from May’s 59.9. Components of the overall index from the June survey were new orders at 61.8, production, or sales, at 65.1, delivery lead time at 57.5, inventories at 56.9, and employment at 51.3. “Although hiring among manufacturers in the state has not been as strong as expected, we continue to track growth in overall business activity in both durable and nondurable producers in the Missouri,” said Goss.

Nebraska: For a 10th consecutive month Nebraska’s Business Conditions Index, a leading economic indicator, expanded above growth neutral. The June reading from a survey of supply managers expanded to 65.3 from 64.1 in May. Components of the overall index for June were new orders at 77.3, production, or sales, at 78.1, delivery lead time at 58.1, inventories at 51.6, and employment at 61.2. “While manufacturing employment growth has leveled off for now, durable and nondurable producers in Nebraska report solid increases in business activity. Most of the recent job growth has been in value added services. However, I do expect recent upturns in hours worked to translate into increases in manufacturing hiring,” said Goss.

North Dakota: North Dakota’s leading economic indicator once again moved above growth neutral. The index, based on a survey of supply managers in the state, slid to 54.6 from May’s 59.2. Components of the overall index for June were new orders at 45.6, production, or sales, at 56.9, delivery lead time at 62.7, employment at 59.3, and inventories at 48.6. “Growth tied to the state’s energy sector has been an important component of North Dakota’s overall economic expansion. Durable goods producers reported healthy business expansions over the past several months. Based on our survey results, this expansion should continue at a solid pace,” said Goss.

Oklahoma: For a sixth straight month, Oklahoma’s leading economic indicator from a monthly survey of supply managers climbed above growth neutral. The Business Conditions Index climbed to 67.4 from May’s 59.8 and April’s strong 59.7. Components of June’s overall reading were new orders at 70.9, production, or sales, at 77.9, delivery lead time at 80.9, inventories at 60.4, and employment at 46.9. “Manufacturers in the state have upped the hours worked to accommodate expansions in business activity. I expect this to translate into both durable and nondurable goods producers in Oklahoma to add to their work forces in the months ahead,” said Goss.

South Dakota: South Dakota’s leading economic indicator continues to point to economic expansion. The index, based on a survey of supply mangers in the state, declined to 66.8 from May’s 67.1. Components of the overall index for June were new orders at 71.7, production, or sales, at 69.7, delivery lead time at 62.9, inventories at 64.7, and employment at 65.0. “Manufacturers have added jobs and increased the hourly work week significantly in the state to accommodate business expansion. Supply managers in South Dakota remain optimistic regarding the economic expansion,” said Goss.

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