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Supply Managers Expect Sharp Upturn in Layoffs

For Second Straight Month Mid-America Firms Reduce Employment

September survey results at a glance:
• After three straight months of declines regional leading economic indicator up slightly
• Employment gauge falls below growth neutral for second straight month
• Business confidence tumbles to lowest level since February 2009
• Approximately 29 percent of firms anticipate layoffs in the next six months, up sharply from December 2010.

For only the second time in the past six months, the Business Conditions Index for the nine-state Mid-America region increased. The index, a leading economic indicator from a monthly survey of supply managers, continues to point to positive, but anemic growth for the region for the next three to six months.

Overall index: The index, which ranges between 0 and 100, rose slightly for Septemberto 52.2 from 52.0 in August. While this is the 22nd consecutive month that the index has been above growth neutral 50.0, industries and firms in the region linked to the domestic economy are experiencing pullbacks in overall economic activity. On the other hand, growth among firms tied to agriculture and international markets has more than offset this weakness. “Putting it together, I expect the region to continue to expand at an anemic pace with little potential for a recession in this region for the near term,” 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.

Employment: For a second straight month, the employment index moved below growth neutral. The September reading was up but still frail at 49.6 from August’s 49.0. “Almost 22 percent of survey companies reported net job reductions for September. This month we asked survey participants about employment prospects for their firm. Approximately 29 percent expect layoffs for their firm in the next six months. This is much higher than the 7 percent that reported likely layoffs in December 2010. Clearly the job outlook has deteriorated even in this part of the country,” 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, dipped to 66.3 from August’s inflationary 71.0. “As regional growth has waned, so have inflationary pressures at the wholesale level. Asked about future price increases, supply managers anticipate input prices growing at an annualized 4.5 percent pace in the next six months. With the current Federal Reserve policy remaining very stimulative, I expect inflation to climb significantly above the Fed’s target,” said Goss.

As one supply manager reported, “It is good to see commodity prices coming down, but unfortunately the bad news is the economy appears to be moving in the same direction.”

Confidence: Looking ahead six months, economic optimism, as captured by the September business confidence index, plummeted to 40.5, the lowest reading since February 2009 and down from 43.4 in August. “It is clear that the economic uncertainty engulfing Europe and the U.S. have dampened the economic outlook of supply managers in the region. Even though the regional economy continues to grow, albeit at a weak pace, supply managers remain concerned about the likely impact of a U.S. recession,” said Goss.

Inventories: Since January 2010, supply managers in the nine-state region have increased inventory levels 19 out of 21 months. “This has been an important source of regional growth. Unfortunately, September’s upturn to 55.0 from August’s 50.5 is likely unintended and due to pullbacks in sales and production,” said Goss.

Trade: Despite a stronger U.S. dollar making imported goods cheaper, firms reduced imports with a September index of 45.5, down from August’s 46.6. The stronger dollar, making U.S. goods less price competitive, and economic weakness among trading partners pushed new export orders to 48.8, down slightly from 54.8. Given the importance of exports to regional growth, the September pullback is a real concern,” said Goss.

Other components: Other components of the September Business Conditions Index were new orders at 49.6, down from 51.2 in August; production or sales at 50.4, down from 54.2; and delivery lead time at 56.4, up from 55.0 in August.

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 April the leading economic indicator for Arkansas increased. The index for September climbed to 60.4 from 50.9 in August. Components of the index were new orders at 61.0, production or sales at 57.4, delivery lead time at 74.8, inventories at 57.7, and employment at 51.2. “Despite an expanding state economy, our surveys indicate little growth in jobs. For example over the past year, Arkansas manufacturing firms have shed more than 5,000 jobs for a 3.2 percent loss. I expect a reversal in manufacturing job losses in the months ahead with overall job growth remaining very weak but positive,” said Goss.

Iowa: Iowa’s Business Conditions Index remained above growth neutral for the 21st straight month. The index from a survey of supply managers slipped to 57.8 from last month’s regional high of 59.3. Components of the index for September were new orders at 52.5, production or sales at 56.0, delivery lead time at 64.1, employment at 58.2, and inventories at 58.4. “Over the past year, Iowa has added more than 5,000 manufacturing jobs with a large share of this gain tied to agriculture. Food producers in the state have also been an important component of recent job growth. Surveys over the past several months point to solid growth for the rest of 2011," said Goss.

Kansas: The Business Conditions Index, a leading economic indicator for Kansas, inched higher but stood at a regional low of 43.8 from August’s 43.6, also a regional low. The survey from supply managers in the state is pointing to pullbacks in the state’s economy in the months ahead. Components of the index for September were new orders at 37.6, production or sales at 41.1, delivery lead time at 57.2, employment at 34.1, and inventories at 48.9. “Over the past year, Kansas has added almost 2,000 manufacturing jobs. While transportation equipment producers in Kansas have lost jobs over the past 12 months, I expect this sector to add jobs in the months ahead even as state job growth turns slightly negative," said Goss.

Minnesota: Minnesota’s leading economic indicator from the monthly survey of supply managers was above growth neutral for the 26th straight month at 55.3, down from 56.3. Components of the index for September were new orders at 57.4, production or sales at 61.2, delivery lead time at 56.0, inventories at 54.1, and employment at 47.6. “Over the past year, Minnesota’s manufacturing sector has added more than 5,000 jobs. Even food processors in the state, after months of job losses, have begun to experience positive job growth. I expect manufacturing job growth to be positive, but weak, in the months ahead,” said Goss.

Missouri: The Missouri Business Conditions Index from a monthly survey of supply managers sank to 47.9 from 50.7 in August. The index, a leading economic indicator, points to economic weakness in the months ahead. Components of the Business Conditions Index for September were new orders at 45.1, production or sales at 44.1, delivery lead time at 54.6, inventories at 49.9, and employment at 45.9. “Over the past year, Missouri’s manufacturing sector has added almost 12,000 jobs. Transportation equipment manufacturers have been an important component of this growth. However, one supply manager in the automobile industry commented that firms had begun to reduce some Saturday production that had been scheduled. Based on our surveys over the past several months, Missouri will lose jobs in the months ahead, albeit at a slow pace,” said Goss.

Nebraska: The Business Conditions Index for Nebraska moved above growth neutral 50.0 for the 11th straight month. The index, a leading economic indicator from a survey of supply managers advanced to 57.4 from 56.8 in August. Components of the index for September were new orders at 55.5, production or sales at 59.1, delivery lead time at 55.4, inventories at 59.4, and employment at 57.7. “Over the past year, durable goods manufacturers in Nebraska have added jobs as nondurable goods producers have reduced jobs. Most of this growth has been tied to agriculture and exports. Based on surveys over the past several months, the state is expected to continue to add jobs at a solid pace for the rest of 2011," said Goss.

North Dakota: North Dakota’s leading economic indicator from Creighton’s monthly survey of supply managers expanded for the month. The Business Conditions Index rose to 56.1 from August’s 50.5. Components of the index for September were new orders at 58.6, production or sales at 53.5, delivery lead time at 52.3, employment at 57.6, and inventories at 48.4. “There are a record number of North Dakotans working in the state today. The energy industry and agriculture sector in North Dakota are pushing overall job growth at a brisk pace. I expect the robust growth to slow somewhat in the months ahead but to remain very healthy,” said Goss.

Oklahoma: The Business Conditions Index for Oklahoma from a monthly survey of supply managers declined to a still healthy 54.1 from August’s 56.8 and July’s 61.9. Components of the index for September were new orders at 52.0, production or sales at 52.2, delivery lead time at 84.6, inventories at 47.4, and employment at 57.9. “Manufacturers linked to energy, food and transportation have been important drivers of the state economy. As a result of these trends, Oklahoma has added more than 11,000 manufacturing jobs over the past year. Our surveys indicate that this positive trend will continue for the rest of 2011 with growth in manufacturing and nonmanufacturing,” said Goss.

South Dakota: South Dakota’s leading economic indicator once again climbed above growth neutral. The Business Conditions Index from a monthly survey of supply managers advanced to 59.3 from Augusts’58.5. Components of the index for August were new orders at 60.6, production or sales at 65.9, delivery lead time at 50.1, inventories at 53.7, and employment at 65.9. “Since bottoming out in July of 2010, manufacturing firms in the state have consistently added jobs. Manufacturers tied to international markets have had especially strong growth. Overall job growth for the rest of 2011 will be solid, but down somewhat from earlier in the year,” said Goss.

Survey results for October will be released on Nov. 1.

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