Inflation Gauge Up Sharply
August survey results at a glance:
- Regional index rises for the first time since March of this year.
- Approximately two-thirds of firms report no impact from federal spending sequestration.
- Inflationary pressures at the wholesale level rise sharply.
- Firms expect prices for products and services they buy to rise 4.6 percent over the next year.
The monthly Mid-America Business Conditions Index, a leading economic indicator for a nine-state region, rose for the first time since March. The index continues to indicate that growth for the fourth quarter of 2013 will be positive, but down from the first quarter of this year.
Overall index: The Business Conditions Index, which ranges between 0 and 100, increased to 53.8 from July's 53.5. “As a result of strong exports and a very healthy farm economy, the Mid-America economy was expanding at a strong pace in the first quarter of this year. Our results point to positive growth for the final quarter of this year but at approximately half the rate of the first quarter. Both exports and farm income growth are down from earlier in the year,” said Ernie Goss, Ph.D., director of Creighton University’s Economic Forecasting Group and the Jack A. MacAllister Chair in Regional Economics.
Employment: After moving below growth neutral for January, the region’s employment gauge has remained above 50.0 for the past seven months. The August reading declined to 52.8 from 55.3 in July. “Nondurable goods manufacturers, especially those tied to agriculture and international markets are cutting employment in the region. Job gains were registered for durable goods producers and value-added nonmanufacturing firms. On the other hand, nondurable goods firms, except for food processors, experienced slight job losses for the month,” said Goss.
Wholesale Prices: The prices-paid index, which tracks the cost of purchased raw materials and supplies, increased for the first time since February of this year. The wholesale inflation gauge climbed to 61.8 from 58.0 in July. "I am concerned that this may be the first signal that the period of benign inflation is over. Weakness in inflationary pressures has provided support for the Federal Reserve's record expansionary money policies including its $85 billion monthly bond buying program, quantitative easing 3 (QE3). I expect upturns in inflationary pressures and asset price bubbles to push the Fed to begin reducing or tapering QE3 at the next meeting of its interest rate setting committee (FOMC) at its Sept. 17-18 meetings. This will mean that interest rates will move somewhat higher in the weeks and months ahead,” said Goss.
This month supply managers indicated that they expect the prices of products and services they buy to rise by 4.6 percent over the next year. This is up significantly from the 2 percent reported in April of this year.
Confidence: Looking six months ahead, economic optimism, as captured by the August business confidence index, fell to 53.9 from July's 56.9. “International tensions and uncertainty surrounding implementation of health care reform pushed supply managers’ economic outlook lower for the month,” said Goss.
In each of the last six months, supply managers were asked how the federal spending sequestration was affecting their company. “In the August survey, approximately two-thirds of supply managers indicated that the cuts have had no impact to date. Slightly less than one-third reported only modest impacts from sequestration. Only 1 percent of businesses reported significant impacts. Thus, the federal spending sequestration remains a non-event in terms of the regional economy,” said Goss.
Inventories: After eight straight months of inventory gains, supply managers reported pullbacks in the level of raw materials and supplies to support future production. The August inventory index sank to 49.4 from 52.7 in July. “In anticipation of slower sales and growth in new orders, companies in our survey have, for the first time since November of last year, reduced inventory levels,” said Goss.
In terms of sustainable purchasing, 77.5 percent of firms reported no change in their practices, 21.3 percent indicated an expansion and 1.2 percent detailed reduction in such programs.
Trade: The new export orders index rose briskly to 56.2 from July's 50.0. The import index slumped to 49.3 from July's 53.6. “Slow regional growth weighed on purchases from abroad for the month. Even though the export reading was up significantly for the month, readings over the past several months have been trending lower as a result of slower global growth,” said Goss.
Other components: Other components of the August Business Conditions Index were new orders at 56.8, up from July's 52.2; production or sales at 60.1, up from last month's 54.2; and delivery lead time at 50.0, down from 53.3 in July. 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 August overall index for Arkansas fell to 45.8 from July’s 52.9. Components of the index from the survey of supply managers were new orders at 36.6, production or sales at 40.4, delivery lead time at 54.4, inventories at 45.8, and employment at 51.8. “Overall manufacturers in the state detailed reductions in business activity for the month with expansions for durable goods producers more than offset by nondurable goods manufacturing losses for the month. As the national unemployment rate has declined for 2013, Arkansas' jobless rate has risen. Based on our survey results, the state's unemployment rate will change little in the months ahead,” said Goss.
Iowa: The Iowa Business Conditions Index declined for a third straight month but remains at a healthy level. The overall index from a survey of supply managers for August slipped to a strong 65.6 from July's 67.4. Components of the index for August were new orders at 77.1, production or sales at 73.2, delivery lead time at 51.5, employment at 61.7, and inventories at 64.4. “Business gains for durable and nondurable goods producers combined to make Iowa's manufacturing sector the strongest in the region for the month. This has spilled over into the broader Iowa economy," said Goss.
Kansas: The Kansas Business Conditions Index for August strengthened to 60.0 from 57.3 in July. Components of the leading economic indicator from the monthly survey of supply managers were new orders at 67.8, production or sales at 74.2, delivery lead time at 49.4, employment at 63.9, and inventories at 44.8. “Business gains for durable and nondurable goods producers combined to push the state's manufacturing sector into solid growth territory. Over the past year, Kansas has added approximately 5,000 individuals to its unemployment rolls. Our surveys over the past several months point to an improvement in the state's jobless rate for the rest of the year,” said Goss.
Minnesota: For a ninth straight month, Minnesota’s Business Conditions Index moved above growth neutral. The index from a monthly survey of supply managers in the state rose to a healthy 59.0 from July's 54.0. Components of the index from the August survey were new orders at 58.0, production or sales at 64.8, delivery lead time at 55.3, inventories at 63.0, and employment at 53.9. “Expansions among durable goods producers in the state more than offset slightly negative conditions for nondurable goods firms, including food processors, pushing the overall manufacturing sector and economy forward,” said Goss.
Missouri: The August Business Conditions Index for Missouri declined slightly to 53.6 from 55.7 in July. Components of the survey of supply managers in the state were new orders at 52.2, production or sales at 60.1, delivery lead time at 50.1, inventories at 48.0, and employment at 57.7. “The state's manufacturing sector, especially durable goods producers, is pushing the state's economy forward. On the other side of the economic coin, telecommunication firms in the state continue to shed jobs," said Goss.
Nebraska: After declining below growth neutral for July, Nebraska's overall index, or leading economic indicator, moved above the 50.0 threshold to 50.6 from July’s 49.1. Components of the index for August were new orders at 52.4, production or sales at 51.6, delivery lead time at 49.6, inventories at 48.3, and employment at 51.3. “Durable and nondurable manufacturers combined to push the overall manufacturing sector forward for the month. Food processors in the state experienced solid business growth for the month," said Goss.
North Dakota: North Dakota’s leading economic indicator sank for August. The overall index, termed the Business Conditions Index, from a survey of supply managers in the state declined to 54.4 from 57.5 in July. Components of the overall index for August were new orders at 53.1, production or sales at 51.4, delivery lead time at 71.4, employment at 54.7, and inventories at 41.5. "Business gains for durable and nondurable goods producers combined to push North Dakota's manufacturing sector into positive growth territory for the month. The mining sector continues to drive state growth higher," said Goss.
Oklahoma: The Business Conditions Index for Oklahoma dipped below growth neutral for August to 49.7 from 52.3 in July. Components of the August survey of supply managers in the state were new orders at 51.9, production or sales at 47.7, delivery lead time at 54.9, inventories at 49.4, and employment at 44.8. “Pullbacks in business activity for nondurable goods producers, including food processors, more than offset gains for durable goods manufacturers. August declines for mining firms and companies linked to the mining sector shed jobs for the month," said Goss.
South Dakota: For a ninth straight month, South Dakota’s leading economic indicator from a survey of supply managers has remained above growth neutral 50.0. The overall index, termed the Business Conditions Index, declined to a healthy 57.4 from July's 64.8. Components of the index for August were new orders at 64.4, production or sales at 62.0, delivery lead time at 55.4, inventories at 50.5, and employment at 54.5. “Manufacturers in the state are reporting solid gains in jobs and business activity. Our surveys point to continuing growth for South Dakota’s economy," said Goss.
Survey results for September will be released on the first business day of next month, Oct. 1.
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