REPORT: Economy Growing and Inflation Easing in Mid-America

Growth in the Mid-America region shows signs of cooling as inflationary pressures begin to diminish, according to a monthly survey of supply managers and business leaders in a nine-state region.

The overall Business Conditions Index slumped to its lowest level of the year but stood at a solid 56.3, down from July’s 60.2 and well above growth neutral 50.0.

“Over the past several months, this leading economic indicator has been pointing to slower but positive growth for the rest of 2006, as higher short-term-interest rates and energy prices restrain growth to a level consistent with Federal Reserve growth targets,” Creighton University Economics Professor Ernie Goss said today.

The prices-paid index, which measures inflation at the wholesale level still indicates inflationary pressures at 80.2, but is down from July’s 82.2. “We are seeing more and more signals in our survey that the Fed rate hikes may be bringing the economy in for a ‘soft landing.’

“The government employment report, that will be released later today, will be a very important indication of the likely interest-rate action by the Federal Reserve Open Market Committee (FOMC) at its next meeting on Sept. 20. Based on our survey and national surveys, I expect the Fed will again forego an interest-rate increase. At this time, I place the likelihood of a September rate hike at 20 percent. However, if the U.S. economy added more than 225,000 jobs in August, I would raise the chances of a rate increase to 50-50,” said Goss, the Jack A. MacAllister Chair in Regional Economics and director of the Creighton Economic Forecasting Group.

The Mid-America August employment reading stood at a healthy 57.0 but down from July’s 58.5.

“August’s employment reading is consistent with an annualized employment growth of 1.7 percent. This level of job growth is still healthy, but down from May’s high employment index of 65.5 that was consistent with an annualized employment growth of 3.1 percent,” said Goss.

Since May of 2004, businesses have endured 17 Federal Reserve rate increases and an increase in the price of a barrel of oil from $40 to $70. “This has had understandably negative impacts on confidence among survey participants. The August confidence index dropped to 47.4, its lowest level since shortly after Hurricane Katrina and well below July’s 52.1,” said Goss.

Minnesota Supply Manger Dan Feder said, “Rising energy and health care costs are hurting business growth and the economic outlook.”

Other components of August’s overall index were: new orders at 53.1, down from July’s 61.6; production at 59.9, down from 65.2; inventories at 63.1, up from 54.4; and delivery lead time at 51.3, down from 55.2.

Trade numbers from the August survey were also less promising. New export orders slumped to 49.9, its lowest level since October 2003 and significantly lower than July’s 54.2. At the same time, imports rose from July’s 55.6 to 57.0.

“These numbers are certainly not encouraging and will tend to slow growth in the months ahead as imports continue to outpace exports. I expect the U.S. trade imbalance to encourage more destructive legislative initiatives by the Congress as we enter the election season,” said Goss.

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 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.

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.

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