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Mid-America Leading Economic Indicator Drops Below Growth Neutral

October survey results at a glance:

  • Leading economic indicator drops below growth neutral for first time since November 2009.
  •  Employment gauge falls below growth neutral for third straight month.
  •  Supply managers expect holiday business activity to be up 1 percent from 2010.
  • More than one in five supply managers expects a 2012 recession.

October Mid-America Leading Economic Indicator Drops Below Growth Neutral: Region Losses Jobs for Third Straight Month

For the first time since November 2009, the Business Conditions Index for the nine-state, Mid-America region plunged below growth neutral. The index, a leading economic indicator from a monthly survey of supply managers, continues to point to anemic growth for the region for the next three to six months with an increasing risk of a recession.

Overall index: The index, which ranges between 0 and 100, sank to 49.9 for October from September’s 52.2. After holding above growth neutral 50.0 for 22 consecutive months, the index unexpectedly turned slightly negative for the month. One reading slightly below growth neutral does not signal a recession, but if the index continues to weaken in the months ahead, the likelihood of a return to recessionary economic conditions becomes a real possibility for 2012. It is evident that the weakness in the national economy has now hit the regional economy,” said Ernie Goss, head of Creighton University’s Economic Forecasting Group.

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.

This month, supply managers were asked if they expected the U.S. economy to move back into recessionary territory for 2012. Approximately 22 percent think a recession is likely while 26 percent judge a recession as unlikely. The remaining 52 percent assess a 50-50 chance of an economic recession in 2012. Almost one year ago when we asked this same question, only 7 percent expected a recession for 2011, while 36 percent thought a recession was unlikely.

“Clearly over the past year, recession expectations have risen among supply managers in the region,” said Goss.

Employment: For a third straight month, the employment index moved below growth neutral. The October reading slumped to 49.0 from 49.6 in September. “States more dependent on agriculture and energy fared much better, in terms of job numbers, than states less reliant on these commodities. Approximately 18 percent of survey companies reported net job reductions for October,” 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, tumbled to 56.0 from September’s 66.3. As regional growth has waned, so have inflationary pressures at the wholesale level. “This is the lowest reading for our inflation gauge that we have recorded since June 2009, the last month of the recession. Lower inflation in the pipeline will give the Federal Reserve more flexibility to further stimulate the economy with another QE3 (Quantitative Easing). I expect a launch announcement at its meeting Dec. 13 with the November meeting used to lay the foundation for the December unveiling,” said Goss.

Inventories: For only the third time in the past two years, supply managers in the nine-state region reduced inventory. “Inventory restocking has been an important source of regional growth. October’s inventory decline to 48.5 from September’s 55.0 was another negative signal for the regional economy,” said Goss.

Confidence: Looking ahead six months, economic optimism as captured by the October business confidence index, rose to a still weak 49.5 from 40.5 in September. “Supply managers’ reduction in inventories, increase in recession expectations and weak confidence are solid indications of slower economic growth in the months ahead with rising recession probabilities,” said Goss.

Trade: Despite a stronger U.S. dollar making imported goods cheaper, imports remain below growth neutral 50 with an October index of 48.0, but up from 45.5 in September. The stronger dollar, making U.S. goods less price competitive, and economic weakness among trading partners restrained new export orders to growth neutral 50.0, slightly up from 48.8 in September. Given the importance of exports to regional growth, recent weakness in sales abroad is a real concern,” said Goss.

Other components: Other components of the October Business Conditions Index were new orders at 45.4, down from September’s 49.6; production or sales at 48.5, down from 50.4; and delivery lead time at 57.9, up from 56.4 in September.

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 fifth time in the past six months, the leading economic indicator for Arkansas declined. The October index, from a survey of supply managers in the state, plunged to 52.7 from September’s 60.4. Components of the index were new orders at 55.5, production or sales at 53.7, delivery lead time at 62.4, inventories at 53.9 and employment at 38.1. “Rising agricultural prices have been a burden on the profitability and business conditions of the state’s large food-processing industry. The recently passed trade pacts, once implemented, will be important sources of long-term Arkansas growth. However over the next three to six months, I expect Arkansas to continue to lose jobs, albeit at a very slow pace,” said Goss.

Iowa: The October Business Conditions Index for Iowa remained above growth neutral for the 22nd straight month. The index from a survey of supply managers slipped to 55.4 from 57.8 in September. Components of the index were new orders at 54.8, production or sales at 53.0, delivery lead time at 60.6, employment at 57.7, and inventories at 50.6. “Strong growth in agricultural machinery production is spilling over into other sectors such as metal product manufacturing. Based on our survey results over the past several months, Iowa will continue to add jobs, albeit at a slow pace, in the next 3 to 6 months," said Goss.

Kansas: The Business Conditions Index, a leading economic indicator for Kansas, rose to 47.9 in October from September’s regional low of 43.8. The survey from supply managers in the state is pointing to job losses for the state’s economy in the months ahead. Components of the index were new orders at 43.8, production or sales at 40.6, delivery lead time at 58.6, employment at 47.1, and inventories at 49.4. “Growth among both durable and nondurable manufacturers in the state continues to slow with the state’s large aeronautics manufacturing industry experiencing pullbacks in economic activity. U.S. and global economic weakness will continue to weigh on the Kansas economy with slight job losses in the next 3 to 6 months for the state,” said Goss.

Minnesota: The Minnesota Business Conditions Index, a leading economic indicator from a monthly survey of supply managers, was above growth neutral for the 27th straight month at 55.4, up slightly from 55.3 in September. Components of the index for October were new orders at 49.9, production or sales at 55.6, delivery lead time at 61.9, inventories at 55.6 and employment at 54.2. “Growth among durable-goods producers is outpacing that of nondurable goods manufacturers. For example, higher agricultural commodity prices have reduced economic activity in the state’s large food-processing sector while health care expansions have pushed medical equipment manufacturers in the state to higher growth and profitability. Growth will continue to be positive with jobs added at a slow pace over the next 3 to 6 months,” said Goss.

Missouri: The Missouri Business Conditions Index from a monthly survey of supply managers sank slightly in October to a regional low of 47.3 from September’s regional low of 47.9. The index, a leading economic indicator, points to economic weakness and job losses in the months ahead. Components of the Business Conditions Index were new orders at 44.6, production or sales at 45.5, delivery lead time at 53.9, inventories at 47.6, and employment at 45.0. “Weakness among nondurable manufacturers such as food processors, more than offset growth for durable- goods producers. Telecommunications and other technology connected businesses in the state continue to experience pullbacks in economic activity. Based on surveys over the past several months, I expect the state’s unemployment rate to rise slightly over the course of the next three to six months,” said Goss.

Nebraska: The October Business Conditions Index for Nebraska remained above growth neutral 50.0 for the 12th straight month. The index, a leading economic indicator from a survey of supply managers sank to 54.3 from 57.4 in September. Components of the index were new orders at 51.0, production or sales at 56.2, delivery lead time at 57.6, inventories at 54.7 and employment at 52.1. “Both durable-and nondurable-goods producers in the state reported solid upturns in business activity. Agricultural equipment manufacturers are detailing healthy business activity. Strength in exports and agriculture will continue to push job growth into positive territory for the next 3 to 6 months,” said Goss.

North Dakota: North Dakota’s leading economic indicator from Creighton’s monthly survey of supply managers expanded for October. The Business Conditions Index rose to a regional high of 57.2 from September’s 56.1. Components of the index for October were new orders at 62.6, production or sales at 58.0, delivery lead time at 62.4, employment at 53.8 and inventories at 49.2. “Growth in North Dakota continues to significantly outpace that of the nation and region. Rapid growth in the state’s energy and agricultural sectors is spilling over into the rest of the state’s economy. Only a significant upturn in the value of the U.S. dollar, which I do not expect, could derail this growth. A higher valued U.S. dollar would tend to push energy and farm commodity prices lower. Each month North Dakota adds to the previous month’s record employment,” said Goss.

Oklahoma: The Business Conditions Index for Oklahoma from a monthly survey of supply managers declined in October to 53.9 from September’s 54.1. Components of the leading economic indicators for October were new orders at 56.0, production or sales at 53.6, delivery lead time at 67.3, inventories at 45.7 and employment at 58.9. “Over the past several months, only Oklahoma has matched North Dakota in terms of consistent economic growth and job gains. Only a significant upturn in the value of the dollar, which would push agricultural and energy prices down, could derail Oklahoma’s expansion. Even so, growth will be modest for the next 3 to 6 months,” said Goss.

South Dakota: South Dakota’s leading economic indicator once again was above growth neutral in October. The Business Conditions Index from a monthly survey of supply managers slumped to 52.6 from September’s 59.3. Components of the index for September were new orders at 45.3, production or sales at 48.0, delivery lead time at 55.1, inventories at 51.9 and employment at a regional high of 63.0. “Manufacturers tied to international markets, agriculture and energy continue to experience very positive growth. Over the past year, the growth in manufacturing jobs has exceeded 4.0 percent, well above the nation and the region. I expect positive but slow job growth for the overall state economy for the next three to six months,” said Goss.

Survey results for November will be released Dec. 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/