Higher Energy Prices Biggest Threat
January survey results at a glance:
- Leading economic indicator soars for January; its biggest jump since October 2009.
- Approximately one in five supply managers indicate that farm income growth is contributing to their companies’ expansion.
- Almost half of supply managers gauge higher energy prices as the biggest economic threat for 2012.
- Business confidence index rockets higher.
The monthly Business Conditions Index for the nine-state, Mid-America region took its biggest jump since October 2009. The index, a leading economic indicator from a monthly survey of supply managers, points to improving growth for the region over the next three to six months.
Overall index: The index, which ranges between 0 and 100, rose to 55.9 from December’s 50.0 and November’s 52.6. “It now appears that December’s tepid reading was due to seasonal or nonrecurring factors such as the flooding in Thailand, which disrupted the regional supply chain. Over the last several months, readings from the surveys point to an advancing economy but with several risks factors that could derail the expansion,” said Ernie Goss, director of Creighton’s Economic Forecasting Group and the Jack A. MacAllister Chair in Regional Economics.
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.
“For much of the region very healthy farm income has been an important driver of overall economic growth. Almost one in five, or 19 percent, of supply managers reported that growth in farm income has been an important factor pushing their firm’s growth higher,” said Goss.
In terms of risk factors, this month almost half, or 46 percent, assessed rising energy prices as the greatest threat to growth prospects for their firm. Another 21 percent reported that mounting federal regulations posed the biggest impediment to expansions while 20 percent indicated that global supply disruptions would be the largest threat to expanding business. No other potential threat rose above single digits according to January responses.
As one supply manager reported, “Rising energy prices are a given. Regulations can come out of the blue.”
Employment: For the first time since July, the employment index climbed above growth neutral. The hiring gauge increased to a healthy 54.5 from December’s 49.5. “While surveys over the past several months indicate that job growth in the region has slowed significantly, January’s reading is clearly good news on the employment front. However, I will have to see several months of similar readings to be assured that the labor market is back on a solid growth path,” said Goss.
Despite adding approximately 140,000 jobs over the past 12 months, regional employment is still down from the region’s prerecession level by almost 360,000 jobs. At the current rate of job additions, it will take another 18 months to return to the prerecession regional job level. North Dakota’s and South Dakota’s current employment levels exceed their prerecession levels with Nebraska and Oklahoma expected to return to prerecession levels before the end of 2012.
Wholesale Prices: The prices-paid index, which tracks the cost of raw materials and supplies, rose to 67.8 from 62.4 in December. “As the economic outlook has improved, so have price pressures. Last week the U.S. Federal Reserve indicated that they would maintain current record-low, short-term interest rates until 2014. In my judgment, this pro-growth stance poses significant inflation risks even as it boosts firms connected to agriculture and energy. This month we asked supply managers to project price increases for the product they buy for the next six months. On average, supply managers expect prices to advance by 2.9 percent in the next six months or approximately 5.8 percent annualized. This is much too high for the Fed to be so aggressive in terms of low interest rates and high money supply growth,” said Goss.
Confidence: Looking ahead six months, economic optimism, as captured by the January business confidence index, jumped to a very strong 67.2 from 59.2 in December. “Recent positive economic data on the national front have had clear and positive impacts on supply mangers’ outlook,” said Goss.
Inventories: After moving below growth neutral for December, the regional inventory once again bounced to a level indicating significant inventory buildups. The January inventory reading rose to 55.3 from December’s 46.7 and November’s 52.9. “Since the end of the recession in 2009, inventory accumulation has been an important source of regional growth. January’s increase was an important factor driving the overall reading higher. The upturn in inventory levels signals expected growth in production in the months ahead and is consistent with the strong business confidence reading for the month,” said Goss.
Trade: January’s export numbers for the Mid-America region were significantly improved from December’s healthy readings. New export orders rose to 60.4 from December’s 56.3. At the same time, January imports climbed to 56.7 from December’s 48.0.
“This is the highest export index since February 2011 and highest import reading since March 2011. While the dollar has strengthened recently, the overall trend is decidedly toward a weak dollar making U.S. goods more competitively priced abroad. Since the end of the recession in 2009, the U.S. dollar has declined by more than 5 percent. At the same time, an expanding regional economy has boosted the purchase of goods from abroad even as foreign goods and services have increased in price,” said Goss.
Other components: Other components of the January Business Conditions Index were new orders at 58.1, up from 52.3 in December; production or sales at 56.9, up from 48.4; and delivery at 54.7, lower than December’s 56.5.
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: The overall index Arkansas, from a survey of supply managers in the state, climbed to 56.0 from December’s 52.0. Components of the index were new orders at 57.0, production or sales at 59.2, delivery lead time at 52.6, inventories at 52.6, and employment at 51.4. “Manufacturers in the Arkansas, both durable and nondurable, are growing jobs at a very slow pace. Instead, manufacturers continue to expand production via increases in the hours worked of current employees. However based on our survey results over the past several months, both manufacturers and nonmanufacturers will add jobs for the first half of 2012, but at a slow pace,” said Goss. Jobs needed to get back to pre-recession level: A gain of 32,000, or 2.7 percent.
Iowa: For the 25th straight month, Iowa’s Business Conditions Index remained above growth neutral. The index, from a survey of supply managers, soared to a regional high 66.0 from 56.3 in December. Components of the index were new orders at 77.1, production or sales at 65.8, delivery lead time at 64.0, employment at 67.2, and inventories at 64.0. “Iowa manufacturers are expanding at the strongest pace in the region. Both durable and nondurable goods manufacturers reported strong business conditions for the month. Firms linked to agriculture and international markets continue to experience very healthy growth,” said Goss. Jobs needed to get back to pre-recession level: A gain of 43,000, or 2.9 percent.
Kansas: The Kansas Business Conditions Index for January, a leading economic indicator, was unchanged from December’s 50.1. As in past months, the survey is pointing to slow, but positive growth for the Kansas economy in the months ahead. Components of the index were new orders at 50.5, production or sales at 55.6, delivery lead time at 48.2, employment at 41.4, and inventories at 54.7. “Both durable and nondurable goods manufacturers reported solid business conditions for the month and for most of 2011. Recent action by the Fed, which will weaken the dollar, will be favorable for the Kansas economy. Telecommunication firms in the state are registering downturns in economic activity,” said Goss. Jobs needed to get back to pre-recession level: A gain of 53,000, or 4 percent.
Minnesota: The January Minnesota Business Conditions Index was above growth neutral for the 30th straight month at 57.5, up from December’s 56.9. Components of the index for January were new orders at 61.0, production or sales at 60.6, delivery lead time at 58.1, inventories at 57.8, and employment at 50.0. “As a result of flooding in Thailand, computer and electronic component producers in the state experienced recent pullbacks in production. Otherwise, durable and nondurable goods manufacturers are reporting solid improvements in business activity. Surveys over the past several months point to positive growth for the first half of 2012 for Minnesota,” said Goss. Jobs needed to get back to pre-recession level: A gain of 105,000, or 3.9 percent.
Missouri: The January Missouri Business Conditions Index climbed back above growth neutral for January. The index, a leading economic indicator from a survey of supply managers, increased to 51.0 from 49.0 in December. Components of January’s Business Conditions Index were new orders at 50.3, production or sales at 50.8, delivery lead time at 55.0, inventories at 49.6, and employment at 49.4. “Among the nine Mid-America states, Missouri has lost more jobs to the recession and subsequent economic weakness than any other state. While Missouri’s manufacturing sector is recording solid improvements other industries, such as telecommunications, continue to experience pullbacks in business activity,” said Goss. Jobs needed to get back to pre-recession level: A gain of 161,000, or 6.1 percent.
Nebraska: The January Business Conditions Index for Nebraska remained above growth neutral 50.0 for the 15th straight month. The index, a leading economic indicator from a survey of supply managers increased to a tepid 51.9 from December’s 51.4. Components of the index were new orders at 52.1, production or sales at 48.8, delivery lead time at 52.8, inventories at 51.5, and employment at 54.1. “Based on recent survey results, I expect Nebraska’s level of employment to return to pre-recession levels in the first half of 2012. Both durable and nondurable manufacturers, especially those linked to agriculture and international markets, reported solid improvements in business activity,” said Goss. Jobs needed to get back to pre-recession level: A gain of 7,000, or 0.7 percent.
North Dakota: The leading economic indicator for North Dakota soared to a very healthy level for January. The Business Conditions Index from a survey of supply managers in the state climbed to 60.3 from December’s 55.6. Components of the index were new orders at 65.6, production or sales at 68.9, delivery lead time at 52.8, employment at 60.0, and inventories at 54.1. “Labor shortages related to the lack of housing in some parts of North Dakota continue to restrain growth in the state. Even so, manufacturers and nonmanufacturers in the state, especially those with links to agriculture and energy, report healthy business activity,” said Goss. Jobs needed to get back to pre-recession level: 0. Current North Dakota employment levels are at a record high.
Oklahoma: The Business Conditions Index for Oklahoma, a leading economic indicator from a survey of supply managers in the state, jumped to 58.3 from 52.1 in December. Components of the leading economic indicator for January were new orders at 52.6, production or sales at 54.1, delivery lead time at 77.4, inventories at 55.7, and employment at 53.0. “Based on recent survey results, I expect Oklahoma’s level of employment to return to pre-recession levels in the first half of 2012. Durable goods manufacturing continues to be stronger than nondurable goods producers in the state. Firms report significant increases in construction activity,” said Goss. Jobs needed to get back to pre-recession level: A gain of 5,000, or 0.3 percent.
South Dakota: South Dakota’s leading economic indicator rose above growth neutral for January. The Business Conditions Index, from a monthly survey of supply managers, rose to 52.8 from December’s weaker 47.7. Components of the index for January were new orders at 53.6, production or sales at 55.6, delivery lead time at 47.3, inventories at 49.0, and employment at 58.7. “Despite somewhat slower growth for the first half of 2012, South Dakota will continue to add jobs. Manufacturers, especially those linked to agriculture and international trade will continue to expand business activity for the first half of 2012,” said Goss. Jobs needed to get back to pre-recession level: Current South Dakota employment exceeds the state’s pre-recession level.
Survey results for February will be released March 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/