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Weather Related Supply Disruptions Push Mid-America Leading Indicator Lower

June survey results at a glance:

  • Leading economic indicator drops for third time in past four months.
  • Approximately one-fourth of supply managers reported weather related supply disruptions for the month.
  •  Business confidence tumbles for June.
  • Inflation gauge cools a bit.

Weather Related Supply Disruptions Push
Mid-America Leading Indicator Lower: Confidence Plummets

For the third time in the past four months, the Business Conditions Index for the nine-state Mid-America region fell. The index from a monthly survey of supply managers is clearly pointing to positive but slowing growth for the next three to six months.

Overall index: The index, a leading economic indicator that ranges between 0 and 100, plummeted to 54.9 from May's 60.2. While this is the 19th consecutive month that the index has been above growth neutral 50.0, the index is clearly trending downward. 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.

“Higher energy prices, and supply disruptions related to the Japanese tsunami and to floods in the Mid-America region are clearly slowing growth in the economy and cooling rapid commodity price growth,” Creighton University Economics Professor Ernie Goss said today.

One supply manager reflected a lot of the sentiment for the month saying, "As an agribusiness throughout the Midwest, our production at several locations has been curtailed, some to the point of closing operations."

Employment: For the 18th straight month, the regional employment index remained above growth neutral though the June job reading declined to 53.6 from 58.1 in May. “This month 21.3 percent of firms reported reductions in employment. This compares to 14.1 percent of firms that indicated pullbacks in our May survey. Year over year job growth in the region has declined by two tenths of one percent over the past three months. Based on our survey, I expect an equivalent decline in the next three months. This will mean that job growth will be roughly one-third of what the region experienced in the last half of the 1990s,” 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, fell to a still inflationary 74.3 from 84.9 in May and April’s record high 94.0. “Slowing growth and an uptick in the value of the dollar helped to bring our inflation gauge down for the month,” said Goss.

The U.S. dollar has ceased its downward movement. “For the month of June, the U.S. dollar sank by 1.3 percent against the world's major currencies. With the end of the Fed's QE2 (Quantitative Easing) program effective July 1, we should see even more short term strengthening in the value of the U.S. dollar. This will tend to put downward pressure on inflation, especially for commodity prices. However, I remain a long-term bear on the value of the dollar. I expect the dollar to continue to weaken in the final quarter for 2011 due to the Fed's low interest rate policies, large U.S. trade deficits and the strengthening of the Chinese Yuan against the dollar. Thus, I expect inflation at the consumer level to remain a problem for the remainder of 2011,” said Goss.

Confidence: Looking ahead six months, economic optimism, as captured by the June business confidence index, tumbled to 52.3 from May's 60.4 and April’s 57.5. “Energy prices combined with uncertainty surrounding the national economy and U.S. debt situation served to puncture business confidence for the month,” said Goss.

Inventories: This month supply managers were asked how the floods had affected supply deliveries to their firms and/or other weather related issues. More than one-fourth, or 26 percent, indicated that supply deliveries had been negatively affected. However, only four percent of firms reported that they had cut back on operations due to the floods and other weather related issues," said Goss. In terms of inventories, for the 16th time in the past 17 months, supply managers in the nine-state region expanded inventory levels. However, the expansion was down significantly for the month with an index of 51.0, plummeting from May's 58.9.

One supply manager reported that his company "was stockpiling inventory just a bit, so that when customers in flooded areas call, we can support them with immediate service."

Trade: A somewhat weaker global economic outlook combined with a somewhat stronger dollar negatively affected the region's export reading with a June new orders index of 54.9, down from 60.1 in May.

Other components: Other components of the June Business Conditions Index were new orders at 55.9, down from 59.6 in May; production or sales at 53.8, down from 60.9; and delivery lead time at 60.1, down from 63.6 in May.

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 a second straight month, Arkansas’ leading economic indicator from Creighton’s monthly survey of supply managers declined. The index for June stood at a healthy 60.2 but down from 64.0 in May and April’s regional high of 74.7. Components of the index for June were new orders at 54.9, production or sales at 59.2, delivery lead time at 60.1, inventories at 61.8, and employment at 60.1. “Since bottoming out in February 2010, the Arkansas economy has added more than 25,000 jobs for a 2.2 percent gain. Based on our surveys, I expect the state to continue to add jobs but at a somewhat slower pace with an employment increase of more than 8,000, or 0.7 percent, for the rest of 2011," said Goss.

Iowa: Iowa’s Business Conditions Index remained above growth neutral for the 18th straight month with a reading of 61.4 . However, the index was down from May’s 65.6 and April’s 69.7. Components of the index for June were new orders at 59.1, production or sales at 60.1, delivery lead time at 67.3, employment at 59.1, and inventories at 60.4. “Since bottoming out in December 2009, the Iowa economy has added more than 22,000 jobs for a 1.5 percent gain. Based on our surveys, I expect the state to continue to add jobs with an employment increase of more than 23,000, or 1.6 percent, for the rest of 2011," said Goss.

Kansas: The Business Conditions Index for Kansas slumped to 52.7 from 59.2 in May. It was the 10th time in the past 11 months that the leading economic indicator from Creighton's monthly survey for the state was above growth neutral. Components of the index for June were new orders at 49.5, production or sales at 52.2, delivery lead time at 67.7, employment at 44.4, and inventories at 49.2.“ Since bottoming out in September 2010, the Kansas economy has added almost 6,000 jobs for a 0.4 percent gain. Based on our surveys, I expect the state to continue to add jobs at this same slow pace with an employment increase of approximately 5,000, or 0.4 percent, for the rest of 2011," said Goss.

Minnesota: Minnesota’s leading economic indicator from the monthly survey of supply managers was above growth neutral for the 23rd straight month at 54.8 but was down significantly from May’s 63.2. Components of the index for June were new orders at 53.6, production or sales at 53.8, delivery lead time at 60.9, inventories at 52.8, and employment at 52.9. “Since bottoming out in September 2009, the Minnesota economy has added almost 28,000 jobs for a 1.1 percent gain. Based on our surveys, I expect the state to continue to add jobs but at a slower pace with an employment increase of approximately 12,000, or 0.5 percent, for the rest of 2011," said Goss.

Missouri: The Missouri Business Conditions Index declined to 54.5 from 57.4 in May. The index continues to point to positive but slowing growth in the months ahead. Components of the Business Conditions Index for June were new orders at 55.1, production or sales at 52.0, delivery lead time at 63.9, inventories at 53.4, and employment at 48.0. One supply manager reported, “Flooding impact is just starting to reach the St. Joseph to Kansas City area so it's bound to become a greater inconvenience. The bigger long-term concern is the impact to corn and other crops for feeds." Since bottoming out in December 2010, the Missouri economy has added almost 18,000 jobs for a 0.7 percent gain. Based on our surveys, I expect the state to continue to add jobs but at a somewhat faster pace with an employment increase of approximately 25,000, or 0.9 percent, for the rest of 2011," said Goss.

Nebraska: Nebraska’s Business Conditions Index declined in June, but it remained above growth neutral 50.0 for the eighth straight month. The index from a survey of supply managers dipped to a still solid 56.0 from May's 57.7. Components of the index for June were new orders at 60.7, production or sales at 58.4, delivery lead time at 55.0, inventories at 50.1, and employment at 55.9. “Since bottoming out in February 2010, the Nebraska economy has added almost 24,000 jobs for a 2.6 percent gain. Based on our surveys, I expect the state to continue to add jobs but at a somewhat faster pace with an employment increase of roughly 20,000, or 2.1 percent, for the rest of 2011," said Goss.

North Dakota: As a result of weather related supply disruptions, the leading economic indicator from Creighton’s monthly survey of supply managers for North Dakota sank below growth neutral. The Business Conditions Index decreased to 44.4 from 58.0 in May. Components of the index for June were new orders at 37.0, production or sales at 32.4, delivery lead time at 61.1, employment at 38.0, and inventories at 53.7. “North Dakota is one of only two states that lost no jobs during the national recession. Since the beginning of the recession, North Dakota has added more than 27,000 jobs for a 7.5 percent increase. Our monthly surveys indicate that this pace of job growth will be somewhat slower for the rest of 2011 with approximately 10,000 jobs added for a 2.6 percent gain,” said Goss.

Oklahoma: While Oklahoma’s Business Conditions Index declined in June it remained above growth neutral for the 18th straight month. The index dropped to 54.7 from 68.2 in May. Components of the index for June were new orders at 49.8, production or sales at 61.5, delivery lead time at 56.7, inventories at 47.4, and employment at 57.9. “Since bottoming out in February 2010, the Oklahoma economy has added more than 38,000 jobs for a 2.5 percent gain. Based on our surveys, I expect the state to continue to add jobs but at a somewhat faster pace with an employment increase of approximately 33,000, or 2.2 percent, for the rest of 2011," said Goss.

South Dakota: The South Dakota Business Conditions Index from a monthly survey of supply managers dipped in June to 60.7 from May's 63.1. Components of the index for June were new orders at 54.5, production or sales at 69.1, delivery lead time at 51.0, inventories at 59.9, and employment at 69.0. “Since bottoming out in February 2010, the South Dakota economy has added more than 4,000 jobs for a 1.1 percent gain. Based on our surveys, I expect the state to continue to add jobs but at a somewhat slower pace with an employment increase of approximately 1,000, or 0.2 percent, for the rest of 2011," said Goss.

Survey results for July will be released on August 1.

Follow Goss on twitter at http://twitter.com/erniegoss

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