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Leading Economic Indicator Begins Year Strong

January survey results at a glance:

  • Business confidence rises to highest level in almost six years.
  • Inflation gauge climbs above 80.0 for the fifth time in the past year.
  • Leading economic indicator points to healthy growth for first half of 2011.
  • Export orders show healthy upturn.

Mid-America Leading Economic Indicator Begins Year Strong:
Exports, Confidence and Inflation Bounce Higher

For a third straight month, the Business Conditions Index, or leading economic indicator, for the nine-state Mid-America region advanced. According to recent surveys of supply managers, the region will continue to expand at a healthy pace, but with rising inflationary pressures at the wholesale level for the first half of 2011.

Overall index: The index, a leading economic indicator which ranges between 0 and 100, expanded to 58.9 from December’s 57.5 and was well above 2010’s low of 52.3 recorded in October. This is the 14th consecutive month that the index has risen above growth neutral. An index of 50.0 is considered growth neutral. Very healthy farm income, expanding trade and a growing transportation sector are pushing growth higher for firms in the region. The overall index, or Business Conditions Index, is a mathematical average of indices for new orders, production or sales, employment, inventories and delivery lead time. This is the same methodology used by the national Institute for Supply Management.

“The regional economy is beginning the year on a very healthy note with global growth, record low interest rates, and a cheap dollar providing a significant boost, especially for firms linked to agriculture and energy. Over the past year, farm commodity prices have risen by 18 percent. This rapid price growth is showing up in farmers’ income and in industries tied to agriculture,” Creighton University Economics Professor Ernie Goss said today.

Employment: For a 13th straight month, the regional employment index remained above growth neutral. The January job reading bounced to a healthy 56.3 from December’s tepid 51.1 and November’s 53.0. For January the number of firms reporting upturns in the size of their workforce was double the number indicating pullbacks in employment.

“The more dependent the area is on agriculture and energy, the stronger the new hiring. I expect the nine-state region to continue to add jobs for the first half of 2011 with the pace of growth to increase in the months ahead,” said Goss, director of Creighton’s Economic Forecasting Group and the Jack A. MacAllister Chair in Regional Economics.

Wholesale Prices: The prices-paid index, which tracks the cost of raw materials and supplies, rose to an inflationary 84.2 from 81.1 in December. This was the fifth time in the past year that the inflation gauge climbed above 80.

“Prices for most raw materials, commodities and supplies are increasing at an unsustainable pace. Over the last year, U.S. commodity prices have risen by 6.6 percent driven by a 12.4 percent upturn in fuel prices and a 9.7 percent gain in metal prices. This increase at the producer level will bolster consumer prices well above the Federal Reserve’s target rate of 2 percent sometime in 2011. I expect long-term interest rates to grow rapidly in the second half of 2011 to compensate investors for rising inflation. The Fed is currently keeping long-term interest rates artificially low with their bond buying program, quantitative easing (QE2),” said Goss.

Confidence: Looking ahead six months, economic optimism, as captured by the January business confidence index, climbed to a very strong 74.8 from December’s 69.9.

“This is the highest confidence index that we have recorded since April 2004. Supply managers remain confident about future economic conditions even though unemployment rates remain well above state historical averages for most areas of the region,” said Goss.

Inventories: For the 11th time in the past 12 months, supply managers in the nine-state region expanded inventory levels, though the index was down from December. The January inventory index sank to 55.8 from 64.4 in December. “As a result of rising economic confidence, firms in the region continue to expand inventories in anticipation of growing sales in 2011. This time last year, supply managers were cutting inventories with a January 2010 inventory index of 48.3,” said Goss.

Trade: Accompanying the global economic rebound, trade numbers improved for January. The January new export orders index advanced to 54.7 from December’s 54.1 and November’s 50.8. The region’s import reading expanded to 55.5 from December’s 50.0.

“The weaker U.S. dollar, making U.S. goods cheaper abroad and foreign goods more expensive in the U.S., are strengthening exports. I expect this trend to continue for 2011 with the global economic rebound adding to the influence of the weaker dollar,” said Goss.

Other components: Other components of the January Business Conditions Index were new orders at 60.2, up from December’s 58.2; production or sales at 62.7 from 55.8; and delivery lead time at 59.5, up from 57.9 in December.

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: The leading economic indicator for Arkansas advanced for the third time in the past four months. The Arkansas Business Conditions Index from the monthly survey of supply managers in the state rose to 59.9 from December’s 57.2. Components of the Business Conditions Index for January were new orders at 66.9, production or sales at 70.8, delivery lead time at 64.3, inventories at 45.7, and employment at 51.4. “The state’s durable goods manufacturing sector has been a prime driver of recent growth with nondurable goods producers experiencing soft business conditions. Contrary to much of the rest of the region, agriculture has not been a prime factor pushing growth higher,” said Goss.

Iowa: For the 13th straight month, Iowa’s Business Conditions Index climbed above growth neutral. The index, a leading economic indicator from a survey of supply managers, climbed to 64.0 from 56.8 in December. Components of the Business Conditions Index for January were new orders at 78.2, production or sales at 68.0, delivery lead time at 65.8, employment at 53.5, and inventories at 54.6. “With the largest agriculture sector among the nine Mid-America states, Iowa’s industries linked to agriculture, except for food processing, have experienced very healthy growth over the past several months. This growth will continue for the first half of 2011 particularly for durable goods producers tied to agriculture and the global economy,” said Goss.

Kansas: For the fifth time in the past six months, the leading economic indicator for Kansas moved above growth neutral. The Business Conditions Index climbed to 53.2 from 48.4 in December. Components of the Business Conditions Index for January were new orders at 57.2, production or sales at 54.4, delivery lead time at 61.1, employment at 41.5, and inventories at 52.2. “We are beginning to see upturns in the state’s durable and nondurable goods producers. Continuing global economic expansion combined with a relatively cheap U.S. dollar will be very positive for Kansas growth prospects for the first half of 2011. Of our nine survey states, Kansas is the most dependent on international markets,” said Goss.

Minnesota: Minnesota’s leading economic indicator was above growth neutral for the 18th straight month. The Business Conditions Index advanced to 55.2 from December’s softer 52.0. Components of the index for January were new orders at 56.0, production or sales at 61.9, delivery lead time at 58.3, inventories at 49.5, and employment at 50.5. “The state’s agriculture is the second largest among the nine Mid-America states. Thus expansions among firms tied to agriculture and international markets have been an important component of Minnesota’s recent growth. On the other hand, the state’s construction industry continues to slow overall state job growth. I expect the state to continue to add jobs for the first half of 2011. This pace will be stronger than the last half of 2010,” said Goss.

Missouri: For the 19th straight month, Missouri’s Business Conditions Index climbed above growth neutral. The index, a leading economic indicator based on a survey of supply managers, grew slightly to 57.5 from 57.4 in December. Components of the Business Conditions Index for January were new orders at 58.1, production or sales at 59.2, delivery lead time at 57.5, inventories at 55.3, and employment at 57.6. “Except for food processors, nondurable goods manufacturers in the state continue to experience weak economic conditions. Durable goods manufacturers, except for those tied to transportation equipment, reported improving economic conditions. Firms involved in and/or tied to vehicle manufacturing have experienced somewhat erratic growth with little new hiring for 2010 and now into 2011,” said Goss.

Nebraska: Nebraska’s Business Conditions Index, a leading economic indicator, climbed above growth neutral 50.0 for a third straight month. The index from a survey of supply managers dipped slightly to 55.7 from 56.4 in December. Components of the Business Conditions Index for January were new orders at 53.3, production or sales at 58.2, delivery lead time at 56.3, inventories at 55.6, and employment at 56.9. “Nebraska has the third largest agriculture sector among the Mid-America states. This has been an important component of both overall and manufacturing growth with both durable and nondurable goods producers expanding at a modest, but improving pace,” said Goss.

North Dakota: The leading economic indicator from Creighton’s monthly survey of supply managers for North Dakota remained above growth neutral. The Business Conditions Index increased to 54.8 from December’s 51.3. Components of the Business Conditions Index for January were new orders at 46.3, production or sales at 45.9, delivery lead time at 68.3, employment at 46.0, and inventories at 67.6. “Among the nine Mid-America states, North Dakota is second only to Oklahoma in its dependence on agriculture and energy to drive economic growth. A combination of an expanding global economy and a weak U.S. dollar will push state growth at a healthy pace for the first half of 2011,” said Goss.

Oklahoma: For the 13th straight month, Oklahoma’s leading economic indicator remained above growth neutral. The Business Conditions Index from a monthly survey of supply managers in the state sank to a still healthy 54.5 from December’s 59.7 and November’s 66.3. Components of January’s Business Conditions Index were new orders at 55.1, production or sales at 49.5, delivery lead time at 78,8, inventories at 38.2, and employment at 51.0. “Among the Mid-America states, Oklahoma has the smallest agriculture sector but the largest energy sector. As a result, nondurable and durable goods producers tied to energy have contributed significantly to the state’s recent growth. This trend will continue for the first half of 2011 as oil and energy commodity prices remain high,” said Goss.

South Dakota: The state’s leading economic indicator points to healthy growth for the first half of 2011. The Business Conditions Index from a monthly survey of supply managers, advanced to 61.1 from 57.2 in December. Components of the Business Conditions Index for January were new orders at 63.2, production or sales at 64.3, delivery lead time at 41.5, inventories at 73.5, and employment at 63.0. “South Dakota is second only to North Dakota in its dependence on agriculture for overall growth. Firms tied to agriculture and international trade will experience healthy growth for the first half of 2011. This will underpin overall state growth for the first six months of 2011,” said Goss.

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