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Mid-America Leading Economic Indicator Advances

Expected Wage Growth Improves

January survey results at a glance:
• Leading economic indicator advances for a third straight month.
• Durable goods manufacturers and business services firms add jobs at a healthy pace.
• Inflationary pressures rise for the month. Wholesale prices expected to grow 3.0 percent in 2014.
• Wages expected to grow by 2.5 percent in 2014.

For a third straight month, the Mid-America Business Conditions Index, a leading economic indicator for the nine-state region stretching from North Dakota to Arkansas, increased.

Overall index: The Business Conditions Index, which ranges between 0 and 100, rose to a solid 57.7 from December’s 53.2. “As in December, very strong growth for firms in the business services industry and durable goods manufacturing more than offset pullbacks for the region’s nondurable goods manufacturing sector,” said Ernie Goss, Ph.D., director of Creighton University’s Economic Forecasting Group and the Jack A. MacAllister Chair in Regional Economics in the Heider College of Business.

Employment: After declining below growth neutral for December, the employment gauge rose to a solid 56.4 from 48.7 in December. “Gains for durable goods manufacturers more than offset losses for nondurable goods producers in the region. The region has now gained back all job losses during the recession. Furthermore, contrary to the rest of the nation, the size of the labor force is now at its highest level ever. Compared to pre-recession levels, only Arkansas and Missouri suffered from discouraged workers leaving the labor force,” said Goss.

This month supply managers were asked how much wages in their firm would increase by in the next year. On average a 2014 pay raise of 2.5 percent is expected. This is up from the 2 percent expected annual gain recorded in November of last year when we asked the same question.

Wholesale Prices: After declining for three straight months, the prices-paid index, which tracks the cost of purchased raw materials and supplies, increased. The wholesale inflation gauge expanded to 71.6 from 63.6 in December. "After remaining tepid for most of the last year, inflationary pressures at the wholesale level are once again expanding at a faster pace. Supply managers indicated that on average they expect prices for the products and services that they purchase to rise by a modest 3.0 percent in 2014. While the Federal Reserve has announced it intends to scale back its bond buying program, termed QE3, by another $10 billion in February, I expect the Fed to begin scaling this program more aggressively in the months ahead as inflationary pressures at the wholesale level rise at a somewhat faster pace,” said Goss.

Confidence: Looking six months ahead, economic optimism, as captured by the January business confidence index, declined to a very strong 62.2 from December’s 66.5. “Improvements in the regional employment, moderate inflation and less D.C. political turmoil, supported supply managers’ business outlook for the month,” said Goss.

Inventories: The inventory index, which tracks the level of raw materials and supplies, expanded to 53.2 from December’s 51.3. “This is yet another signal that supply managers are more upbeat about the economy as they increased inventories in anticipation of expanding sales for their companies in the months ahead,” said Goss.

Trade: The new export orders index slipped to a still solid 54.9 from 55.6 in December. The import index advanced to 52.4 from December’s 47.2. “It is a very encouraging signal to track a third straight month of healthy new export orders. At the same time, firms in the region increased their purchasing from abroad in expectations of upturns in company sales in the weeks and months ahead,” said Goss.

Other components: Other components of the January Business Conditions Index were new orders at 58.5, up from 57.4 in December; production or sales at 64.7, up from December’s 56.8; and delivery lead time at 55.6, up from December’s 52.0.

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 January overall index, or leading economic indicator, for Arkansas dipped to 53.6 from 53.9 in December. Components of the index from the monthly survey of supply managers were new orders at 50.9, production or sales at 49.3, delivery lead time at 50.1, inventories at 64.1, and employment at 53.7. “Durable goods manufacturers and business services firms began the year on a high note. On the other hand, nondurable goods producers continue to shed jobs. Arkansas, Kansas and Missouri are the only states in the Mid-America region that haven’t returned to pre-recession employment levels. Based on our survey results, Arkansas’ employment will be back to fourth quarter 2007 levels by the end of 2014,” said Goss.

Iowa: Iowa’s Business Conditions Index fell to a regional high of 59.1 for January from December’s 61.5. Components of the index from the monthly survey of supply managers were new orders at 60.8, production or sales at 66.5, delivery lead time at 51.6, employment at 59.4, and inventories at 57.1. “Both durable and nondurable manufacturers along with business service firms reported healthy January business activity. Based on our survey results, Iowa’s economy will continue to expand for the next three to six months, but at a slower pace than recorded for the same period in 2013,” said Goss.

Kansas: The Kansas Business Conditions Index for January climbed to 58.3 from 54.5 in December. Components of the leading economic indicator from the monthly survey of supply managers were new orders at 64.9, production or sales at 68.0, delivery lead time at 49.7, employment at 54.1, and inventories at 54.6. “Economic gains for durable goods manufacturers and business service firms more than offset business downturns for nondurable goods producers. Arkansas, Kansas and Missouri are the only states in the nine-state region yet to return to pre-recession employment levels. Based our survey results, Kansas’s employment will be back to fourth quarter 2007 levels by the end of 2014,” said Goss.

Minnesota: For 14 straight months, Minnesota’s Business Conditions Index has remained above growth neutral. The index declined to 57.7 from December’s 58.9. Components of the index from the January survey were new orders at 59.9, production or sales at 61.6, delivery lead time at 58.1, inventories at 54.9, and employment at 53.7. “Healthy improvements among durable and nondurable goods producers are spilling over into the broader Minnesota economy. While construction activity is not back to pre-recession levels, it continues to advance,” said Goss.

Missouri: The January Business Conditions Index for Missouri grew to 53.2 from December’s 51.9. Components of the survey of supply managers in the state were new orders at 54.8, production or sales at 57.5, delivery lead time at 55.4, inventories at 47.9, and employment at 50.3. “Durable and nondurable goods manufacturers began 2014 on a high note with healthy sales and job growth. On the other hand, telecommunications firms in the state continue to shed jobs. Arkansas, Kansas and Missouri are the only states in the nine-state region yet to return to pre-recession employment levels. Based on our survey results, Missouri’s employment will not be back to fourth quarter 2007 levels until the first half of 2015,” said Goss.

Nebraska: After declining below growth neutral for three straight months, Nebraska’s overall index rose above 50.0. The index, a leading economic indicator from a survey of supply managers in the state expanded to 52.2 from December’s 48.1. Components of the index for January were new orders at 53.7, production or sales at 55.6, delivery lead time at 49.1, inventories at 47.7, and employment at 54.8. “Durable and nondurable goods manufacturers along with business service firms experienced solid gains for the month. Nebraska’s economy will add jobs at an annual rate of less than 1 percent in the first half of 2014, down from the same period in 2013,” said Goss.

North Dakota: North Dakota’s leading economic indicator slid to a healthy 56.5 for January from 57.1 for December. Components of the overall index from the monthly survey of supply managers for January were new orders at 53.7, production or sales at 50.9, delivery lead time at 72.3, employment at 56.7, and inventories at 49.1. "North Dakota’s economy will continue to expand at a healthy pace for the first half of 2014, according to our survey results. Gains will be strong for durable goods manufacturers and firms with ties to energy. Construction activity will remain healthy for the first half of 2014,” said Goss.

Oklahoma: After slipping below growth neutral in the third quarter of 2013, Oklahoma’s Business Conditions Index has been pointing toward growth over the last several months. The overall index, a leading economic indicator, fell to 54.7 from 60.2 in December. Components of the January survey of supply managers in the state were new orders at 50.2, production or sales at 61.9, delivery lead time at 48.5, inventories at 61.7, and employment at 51.3. “Growth is picking up for business services firms in the state. While growth remains healthy for durable and nondurable goods manufacturers, it has cooled slightly. Overall, the Oklahoma economy will add jobs at an annualized rate of 2 percent, well above the regional and national pace,” said Goss.

South Dakota: After moving below growth neutral in November of 2012, South Dakota’s leading economic indicator has been above growth neutral 50.0 each month since. The overall index from the monthly survey of supply managers expanded to 55.1 from December’s 53.2. Components of the overall index for January were new orders at 52.2, production or sales at 51.2, delivery lead time at 51.1, inventories at 57.2, and employment at 63.5. “Manufacturing activity continues to expand in the state. Durable and nondurable goods producers are not only adding jobs at a solid pace, they are increasing the hours worked for current employees. Growth will continue to be healthy for the first half of 2014 according to our survey results,” said Goss.

Survey results for February will be released on the first business day of next month, March 3.

Follow Goss on twitter at http://twitter.com/erniegoss.

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