Arkansas economy improves in January, above ‘growth neutral’ for first time in four months

A leading economic indicator for a nine-state region stretching across Midwest America shows that Arkansas businesses saw robust expansion in January which helped to lift the state’s economy above “growth neutral” for the first time since October.

The Creighton University Mid-America Business Conditions Index for January, which ranges between 0 and 100, shows that Arkansas’ economy climbed just above neutral to 50.1 from December’s weak 40.1. Components of the index from the monthly survey of supply managers were new orders at 45.3, production or sales at 47, delivery lead time at 55.9, inventories at 51.2, and employment at 51.

Despite gaining strength at the end of 2015, Arkansas’ overall economy is still being held back by weaknesses in the manufacturing sector, particularly in the area of exports. According to the latest U.S. government data, exports represent approximately 5.7% of the state’s overall economy, said Ernie Goss, director of Creighton’s Economic Forecasting Group.

“This puts Arkansas in 37th place among the 50 states,” the highly-watched Midwest economist said in the report released Monday (Feb. 1). “Since Canada is Arkansas’s number one export market, state exports will remain under pressure since the value of the U.S. dollar to the Canadian dollar has climbed by more than 8% since October 2015.”

The Creighton Economic Forecasting Group has conducted the monthly survey of supply managers in Arkansas, Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, Oklahoma and South Dakota since 1994 to produce leading economic indicators of the Mid-America economy. A reading above 50 indicates the manufacturing economy is expanding; below 50 indicates it is contracting.

Overall, the January Business Conditions Index shows the nine-state Mid-America expanded for the first time since June of last year, but remained below growth neutral at 48.3 from December’s 39.5. Goss said the regional index remains in negative territory in part due to manufacturing losses linked to the strong U.S. dollar and to economic weakness among global trading partners.

“The U.S. dollar strengthened by almost 9% since June of last year and on Friday, the dollar posted its largest gain against the Japanese yen since the fourth quarter of 2014,” Goss said. “This, along with economic weakness among the nation’s chief trading partners has squeezed, and will continue to squeeze, U.S. and regional manufacturers.”

Over the past year, the region has lost approximately 20,000 durable manufacturing jobs, or 2.4% of heavy manufacturing jobs. During this same period, the rest of the nation gained 7,000, or 0.2%, in durable goods manufacturing jobs.

“Areas and industries heavily dependent on durable goods manufacturing, especially those linked to exports, agriculture and energy, are experiencing the largest losses,” said Goss.

This month businesses were asked to describe their hiring situation in January. Nearly 46.3% of the businesses reported that the number of applicants exceeded the number of available jobs at their firm. On the other hand, 18.5% of businesses reported shortages of workers for company job openings.

In other areas of the economy, the wholesale inflation index for January rose to 52.4 from December’s 48.2. “Prices for raw materials and supplies, as reported by regional supply managers, are rising at a pace that will undercut the Federal Reserve’s goal of 2 percent growth in consumer prices,” said Goss.

2016 ECONOMIC OUTLOOK UNCERTAIN
Looking ahead six months, economic optimism, as captured by the January business confidence index, fell to 42.2 from December’s 49.1. Falling agriculture and energy commodity prices, along with global economic uncertainty, continues to restrain supply managers’ expectations of future economic conditions, said the Creighton University economist.

In another sign of a sinking economic outlook, supply managers reduced their inventory levels for the month, though at a slower pace. The January inventory index, which tracks the change in the level of raw materials and supplies, increased to 49.3 from 43.6 in December.

The new export orders stood at a weak 40, up from 33.8 in December. The import index for January expanded to 53.1 from December’s 40.

“The strong U.S. dollar, making U.S. goods less competitively priced abroad, and a weaker global economy, hammered new export orders for the month. On the other hand, the strong dollar, making foreign goods more competitively prices boosted imports above growth neutral for the month,” said Goss.

Other components of the January Business Conditions Index were new orders at 43.7, up from 34.6 in December; production or sales moved higher to 45.3 from December’s 35.4; and delivery speed of raw materials and supplies rose to 53.9 from last month’s 47.3.

NATIONAL BUSINESS CONDITIONS MIXED
The nine-state Mid-America index follows two recent national PMI surveys that confirm the national economy is expanding, despite mixed reports on weaknesses in the manufacturing sector. The Institute for Supply Management’s latest PMI report also released Monday shows activity in the manufacturing sector contracted in January for the fourth consecutive month, while the overall economy grew for the 80th consecutive month.

Manufacturing contracted in January as the PMI registered 48.2%, an increase of 0.2 percentage points from the seasonally adjusted December reading of 48%, indicating contraction in manufacturing for the fourth consecutive month, ISM said.

However, the international Manufacturing Purchasing Managers’ Index released last week by the United Kingdom-based Markit Group reported that U.S. manufacturers began the year with a rebound in output and new business growth from the lows seen during December.

In January, Markit’s (PMI) for the U.S. rose to 52.7 from December’s 38-month low of 51.2 with data signaling a solid upturn in production volumes. It is also the first time the U.S. manufacturing sector’s rate of growth has accelerated since last October, the survey reported.

“The U.S. manufacturing sector found a new lease of life at the start of the year, with growth of factory output and orders both picking up after the slowdown seen late last year,” said Markit Chief Economist Chris Williamson. “Producers appear to have shrugged off worries about China, helped by export orders showing signs of reviving. It looks like weak demand from China is being offset by improved demand for U.S.-produced goods in other markets.”

Similar to the Creighton University’s business conditions index, ISM and the Markit Group compile economic surveys on a monthly basis by polling businesses which represent the makeup of the private sector. However, the British group conducts PMI’s for over 30 countries worldwide, while ISM’s data looks solely at the U.S. economy.