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Mid-America Leading Economic Indicator Drops to Recession Level

Inflation Gauge Higher

October survey results at a glance:

  • The leading economic indicator drops to lowest level since May 2009.
  •  Employment gauge sinks below growth neutral for the third straight month.
  •  Fallout from the drought and QE3 pushed the wholesale price index to its highest level since March of this year.
  • Supply managers expect 2013 holiday sales to grow by only 2 percent from 2012.

For the third time in the past four months, the monthly Mid-America Business Conditions Index, a leading economic indicator for a nine-state region, declined below growth neutral. The index is pointing to slightly negative growth for the region in the next three to six months.

Overall index: The Business Conditions Index, which ranges between 0 and 100, slumped to 46.5 from September’s tepid 50.4. “Growth in the regional economy is definitely moving lower. Surveys over the past several months point to slightly negative growth for the next three to six months. However as in past months, two states with significant dependence on energy, North Dakota and Oklahoma, will continue to expand at a positive pace while the rest of the region pulls back,” said Ernie Goss, director of Creighton University’s Economic Forecasting Group and the Jack A. MacAllister Chair in Regional Economics.

Employment: The region’s employment gauge remained below growth neutral. The index increased to a weak 47.7 from September’s 46.1 but was down from August’s 49.5. These are the weakest job readings recorded since shortly after the recession ended in 2009. “The manufacturing sector has been shedding jobs over the past several months. U.S. Bureau of Labor Statistics data for September indicate that the region lost more than just manufacturing jobs in September of this year. When this data are released for October later in November, I expect it to show that the region continues to shed jobs but at a slow pace. Job gains in North Dakota and Oklahoma will be more than offset by declines in the rest of the region,” said Goss.

Wholesale Prices: The prices-paid index, which tracks the cost of purchased raw materials and supplies, advanced to 71.5 from 66.0 in September. “The Federal Reserve’s latest stimulus, quantitative easing 3 (QE3), and regional drought conditions are pushing the wholesale price gauge well above acceptable levels. I expect this to show up in higher consumer prices in the months ahead. This will limit the Fed’s options regarding further monetary easing,” said Goss.

Confidence: Looking ahead six months, economic optimism, as captured by the October business confidence index, climbed 58.0 from September’s very weak 44.7. “Despite less favorable business conditions for their own firms, supply managers are more positive about the overall economy in the months ahead. Even with the looming fiscal cliff, improvements in the national unemployment rate and upturns in the U.S. housing market are boosting the outlook of supply managers,” said Goss.

This month supply managers were asked to gauge the likelihood of a 2013 recession. Almost one-fourth or 23.4 percent think a recession is likely, or very likely for 2013. An almost equal 22.7 think a 2013 recession is unlikely. The remaining 53.9 percent think there is a 50-50 chance of a recession next year.

Inventories: Regional inventory levels continued to decline and at an accelerating rate. The October inventory index declined to 43.5 from 49.2 in September. “Supply managers have cut inventories for four straight months. The last time this happened was in 2009 when supply managers were reducing inventories in anticipation of new orders and sales,” said Goss.

This month supply managers were also asked to estimate the percentage increase in 2013 holiday sales from 2012. Overall a very low 2 percent growth is expected. Approximately, 16.5 percent expect a gain of more than 4 percent. On the other hand, almost 15 percent expect a decrease in 2013 holiday sales over their 2012 levels. “To be considered healthy, holiday sales should grow in excess of 5 percent from the previous year sales,” said Goss.

Trade: New export orders were surprisingly strong for October. The new export orders index soared to 60.8 from September’s much weaker 48.7. At the same time, October imports contracted for the month with an index of 44.2 which was down from 48.9 in September. “We are seeing some benefits of the Fed’s weak dollar policy which has made U.S. goods more competitively priced abroad and foreign goods less competitively priced in the U.S.,” said Goss.

Other components: Other components of the October Business Conditions Index were new orders at 43.3, down from 48.7 in September; production or sales at 43.9, down from 51.7; and delivery lead time at 54.1, off from September’s 56.4.

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 forecasting group’s 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. The 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, formerly the Purchasing Management Association, since 1931.

Arkansas: The October overall index, or leading economic indicator, for Arkansas fell to 42.3 from September’s 49.6. Components of the index from the monthly survey of supply managers were new orders at 34.3, production or sales at 37.3, delivery lead time at 50.1, inventories at 50.2, and employment at 39.5. “According to U.S. Bureau of Labor Statistics, even though the state’s unemployment rate declined, Arkansas lost jobs in September on a seasonally adjusted basis. Additionally, discouraged unemployed left the work force in September. Our results indicate that this trend continued in October and is likely to persist for the next three to six months,” said Goss.

Iowa: Iowa’s October Business Conditions Index declined to 54.2 from 56.5 in September. The overall index, from a survey of supply managers in the state, has remained above growth neutral for the last 34 months. Components of the index for October were new orders at 57.1, production or sales at 50.4, delivery lead time at 53.9, employment at 53.2, and inventories at 52.8. “According to U.S. Bureau of Labor Statistics, the state’s unemployment rate plunged in September. While our survey of Iowa businesses over the past several months have been positive and pointing to reduced unemployment and job gains, they have not been nearly as robust as BLS data indicate. I expect significant upward revisions to the Iowa unemployment data in the months ahead even as the state continues to grow, but at a very modest pace,” said Goss.

Kansas: The Kansas Business Conditions Index for October advanced to a weak 47.9 from September’s 47.3. Components of the index from the October survey of supply managers in the state were new orders at 42.7, production or sales at 46.6, delivery lead time at 48.4, employment at 63.8, and inventories at 38.0. “According to U.S. Bureau of Labor Statistics, the state’s unemployment rate plunged in September. Our surveys of Kansas businesses over the past several months have been much less positive and not nearly as robust as BLS data indicate. I expect significant upward revisions to the Kansas unemployment data in the months ahead as the state’s economic growth cools in the months ahead,” said Goss.

Minnesota: For a fourth straight month, the Minnesota Business Conditions Index slumped below growth neutral. The index, based on a survey of supply managers in the state, dipped to 47.1 from 47.2 in September. This is the first time since the recession that the overall index has been below 50.0 for four straight months. Components of the index from the October survey were new orders at 36.3, production or sales at 39.3, delivery lead time at 61.9, inventories at 50.1, and employment at 47.9. “U.S. Bureau of Labor Statistics data show that the state lost manufacturing jobs in September even as the unemployment rate declined. Our surveys indicate that Minnesota continued to lose manufacturing jobs in October. I expect these jobs losses to persist, though at a slight pace, in the months ahead. Nondurable goods producers, especially food processors are reporting weakness. Furthermore, I expect the BLS to revise September unemployment rates upward in the months ahead,” said Goss.

Missouri: The October Missouri Business Conditions Index slipped to 50.0 from 51.0 in September. Components of the survey of supply managers in the state for October were new orders at 48.4, production or sales at 51.0, delivery lead time at 55.9, inventories at 41.7, and employment at 52.9. “Missouri is one of four states in the region that did not experience an overall index reading below growth neutral for the month. Strong growth in durable goods manufacturing has more than offset weakness among nondurable goods producers. Even for Missouri, job growth for the next three to six months will be weaker than for the same period one year ago,” said Goss.

Nebraska: For the third time in the past four months, Nebraska’s leading economic indicator fell below growth neutral. The Business Conditions Index, from a survey of supply managers, slumped to 45.5 from September’s 50.3. Components of the index for October were new orders at 39.8, production or sales at 41.1, delivery lead time at 52.9, inventories at 49.5, and employment at 44.0. “Stronger growth among durable goods producers prevented the overall index from sinking lower. Nondurable goods producers, including food processors, are experiencing pullbacks in economic activity. Job growth will be slightly negative in the next three to six months according to our recent survey results,” said Goss.

North Dakota: The leading economic indicator for North Dakota once again expanded to a regional high. The Business Conditions Index from the survey of supply managers increased to 64.1 from 61.6 in September. Components of the overall index for October were new orders at 68.8, production or sales at 70.7, delivery lead time at 57.1, employment at 67.8, and inventories at 56.3. “Each month, employment in North Dakota rises to record levels for the state. We are tracking gains in both durable and nondurable goods producers. Transportation firms are experiencing very strong growth related to the state’s very healthy energy sector,” said Goss.

Oklahoma: The Business Conditions Index for Oklahoma advanced for October. The leading economic indicator from the supply manager survey climbed to 63.3 from September’s 56.6. Components of the October survey of supply managers in the state were new orders at 77.4, production or sales at 74.8, delivery lead time at 39.3, inventories at 71.0, and employment at 54.2. “Even as Oklahoma’s economy has expanded at a solid pace, we are tracking somewhat weaker, but positive, job growth. Companies in the state report shortages of skilled labor,” said Goss.

South Dakota: For a fourth straight month, the leading economic indicator for South Dakota remained below growth neutral. The Business Conditions Index from a survey of supply managers in the state slipped to 45.3 from 46.6 in September. Components of the index for October were new orders at 51.4, production or sales at 55.3, delivery lead time at 50.0, inventories at 27.7, and employment at 42.0. “Job growth for 2012 has been virtually nil for the state. Our surveys point to slightly negative employment growth for the next three to six months,” said Goss.

Survey results for November will be released Dec. 3.

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