Economic conditions improve slightly in Midwest

Creighton University economics professor Ernie Goss says July’s Mid-America Business Conditions survey shows that strong export markets and farm income are keeping the region barely out of recession.
Friday, August 1, 2008 | 10:54 a.m. CDT

OMAHA, Neb. - A survey of business leaders suggests economic conditions in the Midwest and Plains marginally improved last month as inflationary pressures increased.

Creighton University economics professor Ernie Goss says July's Mid-America Business Conditions survey shows that strong export markets and farm income are keeping the region barely out of recession.

The Business Conditions Index advanced to a still weak 51.5 from June's 50.5. Any score above 50 on the index, which ranges between 0 and 100, indicates a growing economy over the next three to six months.

In his report issued Friday, Goss said: "Based on the survey results, I see little change going forward for the region with excessive inflationary pressures, and slight job losses and an economy that continues to grow at an anemic pace. Without strong farm income and healthy exports, the regional economy would already be dipping into recessionary territory."

Goss, who is director of Creighton's Economic Forecasting Group, oversees the nine-state survey of supply managers and business leaders. The states are Arkansas, Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, Oklahoma and South Dakota.

Higher prices for energy and commodities are still plaguing businesses in the region. The survey's inflation gauge, the prices-paid index, rose to its highest level since the survey began in 1994: 93.9, up 2.2 percentage points from 91.7 in June.

It was the fifth month in a row that the prices-paid index remained above 90. Business leaders and supply managers who took part in the survey said prices were higher for diesel fuel, steel mill products and natural gas.

Goss said that when the Federal Reserve's rate-setting committee meets Tuesday, it can't cut rates because of inflation fears. But neither can it raise rates, he said, lest doing so push the economy "into a prolonged recession."

Goss said he doesn't expect the Fed to raise rates at least until early next year.

Reflecting the economic uncertainty, the survey's employment gauge dropped below growth neutral, to 41.4. That's its lowest mark since December 2001.

"As in previous months, job expansions linked to exports, healthy farm income and biofuels production were more than offset by the negative impact of higher energy and commodity prices," Goss said.

"For the second quarter, job losses for the region as a whole have been less than 0.5 percent annualized. I expect the region to continue to lose jobs at this pace for the next three to six months."

The survey participants revealed their pessimism in the confidence index. It hit a weak 37.8 in July, which was 2.7 percentage points higher than the 35.1 in June.

"Higher energy and commodity prices, combined with the flood of bad news stemming from the national mortgage banking sector, have clearly undermined supply managers' economic outlook six months down the road," said Goss.

Growth in new export orders was a bright spot in the July survey.

"The cheap dollar, which makes U.S. goods less expensive abroad, pushed the new export orders index to 55.4," Goss said. "While this is healthy, it is down from June's more robust 59.2 and reflects slowing economic growth for our trading partners. At the same time, the weak dollar has yet to really restrain imports to any great degree. The July import index rose to 56.3 from June's 53.8."

Other components of the Business Conditions Index in July were:

— new orders at 52.6, up from June's 46.6;

— production at 55.7, down from 54.4;

— and inventories at 54.0, up from 49.0.

The Creighton's Economic Forecasting Group has conducted the monthly survey since 1994.

The Institute for Supply Management, formerly the Purchasing Management Association, began to formally survey its membership in 1931 to gauge business conditions. The Creighton Economic Forecasting Group uses the same methodology as the national survey.

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