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Exports Push Mid-America Leading Indicator Higher

May survey results at a glance:

• Leading economic indicator rises for first time since February.
• New export orders climbs sharply.
• Few companies reported expanding real estate space utilization.
• Even fewer companies expect to expand real estate space utilization with new construction and/or leasing over the next six months.

Exports Push Mid-America Leading Indicator Higher:
Wholesale Inflation Still a Problem

For the first time since February of this year, the Business Conditions Index, a leading economic indicator for the nine-state Mid-America region, increased. The index from a monthly survey of supply managers is pointing to positive growth for the next three to six months. As in prior months, the May survey indicated soaring inflationary pressures at the wholesale level.

Overall index: The index, a leading economic indicator that ranges between 0 and 100, advanced to 60.2 from 57.7 in April. This is the 18th consecutive month that the index has been above growth neutral 50.0. 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

“While higher commodity prices have cooled regional growth a bit, our survey points to a healthy expansion in the months ahead with exports making a significant contribution to growth,” Creighton University Economics Professor Ernie Goss said today.

Employment: For the 17th straight month, the regional employment index remained above growth neutral as the May job reading expanded to 58.1 from April’s 54.0. “This month 14.1 percent of firms reported reductions in employment. This compares to 16 percent of firms that indicated pullbacks in our April survey. Job growth was especially strong for firms more dependent on international sales and those with ties to agriculture,” 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, slipped to a still inflationary 84.9 from April’s record high 94.0. “Companies continue to report transportation surcharges for their purchases with sellers resisting price negotiations. The higher commodity prices, especially for energy products, is cutting into the profit margins of businesses that we survey each month,” said Goss.

Record high inflationary pressures at the wholesale level have begun to spill over into consumer prices. “For example, since December of last year, the core consumer price index, which excludes energy and food, has exceeded 3 percent on an annualized basis, even though the Federal Reserve (Fed) indicated it would end its buying of long-term U.S. Treasury bonds, quantitative easing 2 (QE2), this summer. I expect the Fed’s record-low short-term interest rates to continue to weaken the dollar and push inflation above the Fed’s comfort zone,” said Goss.

This month survey participants were asked how their firms have changed their real estate utilization over the past six months and how their real estate utilization will change for the next six months.

Approximately 17.8 percent indicated they had expanded real estate utilization while 3 percent reported reducing real estate utilization over the past six months. The remaining 79.2 percent indicated that their real estate utilization had not changed in the past six months.

One supply manager reported, “We did not expand our company space. However, we greatly expanded our capacity through significant outsourcing, domestic and international.”

“For the next six month period, approximately 13.1 percent indicated they expect their firm’s real estate space utilization to expand while 9.0 percent anticipate a reduction. The remaining 77.9 percent indicated their real estate utilization would not change over the next six months,” said Goss.

Confidence: Looking ahead six months, economic optimism, as captured by the May business confidence index, grew to 60.4 from April’s 57.5. “Recent pullbacks in energy prices had a positive impact on supply manager’s economic outlook. Even so, supply mangers said they expect elevated commodity prices to limit future economic expansion,” said Goss.

Inventories: For the 15th time in the past 16 months, supply managers in the nine-state region expanded inventory levels. The May reading expanded to 58.9 from April’s 53.7. “The upturn in inventory levels of raw materials and supplies for the month is another indication of the expansion in economic optimism among supply managers,” said Goss.

Trade: An expanding global economy continues to boost regional trade numbers. Aided by a cheap dollar making U.S. goods more competitively priced abroad, May’s new export orders index advanced to 60.1 from 57.1 in April. The region’s import reading dipped to 53.3 from April’s 56.1. “The cheap dollar and a global economic expansion combined to boost sales and new orders from abroad,” said Goss.

Other components: Other components of the May Business Conditions Index were new orders at 59.6, up slightly from 59.5 in April; production or sales at 60.9, up from 59.5; and delivery lead time at 63.6, up from 62.0 in April.

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 December of last year, Arkansas’ leading economic indicator from Creighton’s monthly survey of supply managers declined. Even so, the index stood at a healthy 64.0, down from April’s regional high of 74.7. Components of the index for May were new orders at 59.9, production or sales at 68.5, delivery lead time at 67.8, inventories at 63.5, and employment at 60.2. “Arkansas has added more than 12,000 jobs in 2011. Our survey indicates that the pace of job additions will climb in the months ahead. Despite very attractive interest rates and an expanding economy, Arkansas companies have been very reluctant to construct new facilities,” said Goss.

Iowa: Iowa’s Business Conditions Index remained above growth neutral for the 17th straight month, . The index dipped to 65.6 from 69.7 in April. Components of the index for May were new orders at 68.3, production or sales at 64.5, delivery lead time at 70.2, employment at 68.3, and inventories at 56.6. “Iowa’s manufacturing sector continues to expand at a very healthy pace. The state’s large durable goods industry is benefiting from the cheap dollar making U.S. goods more competitively priced abroad. Furthermore, very healthy farm income has bolstered sales of Iowa agriculture equipment manufacturers. I expect growth tied to agriculture to remain positive, but moderate significantly in the months ahead,” said Goss.

Kansas: The Business Conditions Index for Kansas rose to 59.2 from 58.4 in April. It is the ninth time in the past 10 months that the leading economic indicator for Kansas was above growth neutral. Components of the index for May were new orders at 59.0, production or sales at 68.5, delivery lead time at 67.8, employment at 60.2, and inventories at 63.5.“Except for aircraft and aerospace parts producers, durable goods producers in Kansas are experiencing very healthy growth especially for firms with ties to international markets. Higher commodity prices continue to cut into profits and economic activity for Kansas food processors,” said Goss.

Minnesota: Minnesota’s leading economic indicator from the monthly survey of supply managers was above growth neutral for the 22nd straight month at 63.2, up from 60.9 in April. Components of the index for May were new orders at 65.2, production or sales at 67.6, delivery lead time at 66.7, inventories at 55.5, and employment at 60.8. “Despite a construction industry that continues to restrain Minnesota economic growth, durable and nondurable goods producers report rapidly improving business activity. Higher commodity prices are negatively affecting Minnesota food processors,” said Goss.

Missouri: The Missouri Business Conditions Index climbed above growth neutral to 57.4, up slightly from 57.2 in April. The index continues to point to growth in the months ahead. Components of the Business Conditions Index for May were new orders at 57.2, production or sales at 57.1, delivery lead time at 62.5, inventories at 56.8, and employment at 53.3. “Except for food processors and vehicle manufacturers, manufacturers in Missouri reported healthy growth for the month. Higher commodity prices are negatively affecting food manufacturers while supply chain delays are having adverse impacts on Missouri vehicle manufacturers,” said Goss.

Nebraska: Nebraska’s Business Conditions Index moved above growth neutral 50.0 for the seventh straight month. The index from a survey of supply managers climbed to 57.7 from 54.4 in April. Components of the index for May were new orders at 61.3, production or sales at 60.9, delivery lead time at 54.5, inventories at 53.9, and employment at 58.1. “An expanding manufacturing sector is spilling over into the rest of the state’s economy. For example, rail transportation is growing rapidly even as higher fuel prices have restrained growth for trucking firms,” said Goss.

North Dakota: The leading economic indicator from Creighton’s monthly survey of supply managers for North Dakota once again climbed above growth neutral. The Business Conditions Index rose to 58.0 from April’s 56.1. Components of the index for May were new orders at 57.4, production or sales at 52.2, delivery lead time at 72.2, employment at 51.0, and inventories at 57.3. “North Dakota’s rapidly expanding energy sector is pushing overall state growth into an even healthier range. For durable goods producers, expanding sales abroad, supported by a cheap dollar, continue to support growth in the state,” said Goss.

Oklahoma: For the 18th straight month, Oklahoma’s leading economic indicator remained above growth neutral. The Business Conditions Index from a monthly survey of supply managers dipped to a still robust 68.2 from 68.8 in April. Components of the index for May were new orders at 74.6, production or sales at 73.1, delivery lead time at 63.4, inventories at 69.9, and employment at 59.8. “The state’s large energy sector is benefiting from higher energy commodity prices. However due to very strong productivity growth, this sector has grown sales much more briskly than employment. This growth along with rapid growth among the state’s durable goods producers has pushed commercial and industrial construction higher and more than offset a weak Oklahoma residential housing sector,” said Goss.

South Dakota: South Dakota’s leading economic indicator once again rose above growth neutral. The Business Conditions Index from a monthly survey of supply managers, rose to 63.1 from April’s healthy 61.2. Components of the index for May were new orders at 59.1, production or sales at 63.3, delivery lead time at 52.1, inventories at 69.7, and employment at 71.4. “Manufacturers in the state report healthy economic activity for the month. As a result of the manufacturing expansion, durable and nondurable goods producers have increased employment at a steady pace but have also increased the hours worked by current employees dramatically over the past several months,” said Goss.

Survey results for June will be released on July 1.

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