Economic Rebound

Omaha, NE – For the fourth straight month, the Business Conditions Index, or leading economic indicator, for the nine-state Mid-America region advanced. According to recent surveys of supply managers, the region will continue to expand at a very healthy pace for the first half of 2011, but with rising inflationary pressures at the wholesale level.

Overall index: The index, a leading economic indicator that ranges between 0 and 100, climbed to 63.2 from 58.9 in January. This is the 15th consecutive month that the index has risen above growth neutral. An index of 50.0 is considered growth neutral. A rapidly growing agriculture sector and soaring trade are pushing growth higher for firms in the region, particularly companies in non-urban areas of the region. 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.

"The Federal Reserve's (Fed) policy of record-low interest rates producing a cheap dollar is providing a significant boost to the regional economy. Since December 2008, the Fed has maintained short-term interest rates (the funds rate) between zero and 0.25 percent. This has contributed significantly to an 18 percent increase in farm product prices over the past year and to very rapid growth in exports," Creighton University Economics Professor Ernie Goss said today.

Employment: For a 14th straight month, the regional employment index remained above growth neutral. The February job reading bounced to a strong 58.3 from January's healthy 56.3. "This month, only 11.3 percent of firms reported layoffs. This compares to 24 percent reporting layoffs at the beginning of the nation's economic rebound in July 2009. Firms in nonurban areas are reporting much stronger hiring than their counterparts in urban areas of the region," said Goss, director of Creighton's Economic Forecasting Group and the Jack A. MacAllister Chair in Regional Economics.

Wholesale Prices: The prices-paid index, which tracks the cost of raw materials and supplies, ballooned to 89.2 from 84.2 in January. "Since the national recession ended in June 2009, we have tracked what I consider to be unsustainable increases in our inflation gauge," said Goss.

This month supply managers were asked how much they expected prices of products they buy to increase in the next six months. Approximately one-third of the supply managers expect these prices to grow by more than 6 percent over the next six months. Overall supply mangers anticipate prices to grow by 4.4 percent over the next six months, or approximately 8.8 percent on an annualized basis. "Our surveys show no signs that this pace will slow in the coming months. As I have said in past months, I expect long-term interest rates to grow rapidly in the second half of 2011 to compensate lenders for rising inflation," said Goss.

Confidence: Looking ahead six months, economic optimism, as captured by the February business confidence index, dipped to a still strong 71.0 from 74.8 in January. "It is clear that oil prices bouncing around $100 per barrel contributed to February's slippage. Nonetheless, supply managers remain confident about future economic conditions even though unemployment rates remain well above historical averages for most states in the region," said Goss.

Inventories: For the 12th time in the past 13 months, supply managers in the nine-state region expanded inventory levels. The February inventory index rose to a robust 61.9 from 55.8 in January. "As a result of rising current economic conditions and expanding business confidence, firms in the region continue to expand inventories in anticipation of growing sales in 2011," said Goss.

Trade: An expanding global economy is pushing trade higher. Aided by a cheap dollar making U.S. goods more competitively priced abroad, February's new export orders index rocketed to 62.4 from 54.7 in January. The region's import reading expanded to 57.7 from January's 55.5. "The Fed's expansionary interest rate policies continue to weaken the U.S. dollar and strengthen regional exports. I expect this trend to continue until the Fed abandons QE2 (quantitative easing 2) sometime this summer," said Goss.

This month supply managers were also asked how their international buying had changed over the past six months. Almost one-fourth indicated that their firm's international buying had expanded while only 10 percent reported a contraction in buying from abroad.

Oklahoma: For the 14th straight month, Oklahoma's leading economic indicator remained above growth neutral. The Business Conditions Index from a monthly survey of supply managers climbed to 62.2 from 54.5 in January. Components of February's index were new orders at 57.1, production or sales at 54.8, delivery lead time at 89.4, inventories at 49.1, and employment at 60.5. "Even though the state has begun adding manufacturing jobs at a healthy pace, the manufacturing sector has still lost more than 25,000, or 16.6 percent, of its employment base since the beginning of the recession. Our surveys over the past several months point to job expansions for durable and nondurable manufacturing and the overall economy well into the third quarter of this year," said Goss.