Arkansas, regional economy ‘still soft’ as manufacturing sector woes continue

A leading economic indicator for Midwest America shows that business activity in Arkansas contracted in February as the rest of the nine-state regional economy rose about “growth neutral” for the first time since July 2015.

The Creighton University Mid-America Business Conditions Index for February, which ranges between 0 and 100, improved to a still soft 50.5 from January’s 48.3.  Over the past several months, the regional index, much like the national Purchasing Managers’ Survey also released on Monday, has indicated that the manufacturing sector is experiencing anemic but stabilizing, economic conditions.

“A strong U.S. dollar and weakness among the nation’s chief trading partners remains a restraint on regional growth. For example, against the currency of region’s primary trading partner, Canada, the U.S. dollar has strengthened by 30% since July 2014. This upturn has made U.S. goods much less competitively priced in Canada,” said Ernie Goss, director of Creighton University’s Economic Forecasting Group and the Jack A. MacAllister Chair in Regional Economics in the Heider College of Business.

In Arkansas, business activity struggled to keep pace with rest of the region as the state’s manufacturing sector hit strong headwinds after the starting the year off with robust growth. Arkansas’ February overall index, sank to 46.1 from January’s robust 50.1. Components of the index from the monthly survey of supply managers were new orders at 46.0, production or sales at 47.6, delivery lead time at 46.7, inventories at 42.4, and employment at 47.8.

“Over the past 12 months, Arkansas has lost 4,500, or 2.9% of its manufacturing jobs. Our surveys over the past month indicate these job losses will continue, but at a slower pace in the next three to six months. These losses will reduce overall state job growth,” Goss said.

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.

This month, businesses across the nine-state region were asked to name the greatest economic threat facing their firm for 2016. Approximately 17.55% indicated finding and hiring qualified workers would be the biggest challenge or threat to business success in the coming year. Nearly 39.7% of businesses reported U.S. economic weakness represented the greatest economic threat for 2016. The remaining responses were spread across many other issues according to the supply managers.

Meanwhile, the regional employment gauge sank for February to 44.4 from January’s 49.3.

“Employment is a lagging economic indicator. Therefore, I expect the solid improvement in new orders and production for the month to spill over into the job market in the months ahead with modest gains for the overall regional labor market. However, I expect for job losses to continue for the two energy dependent states, North Dakota and Oklahoma,” said Goss.

The wholesale inflation index for February rose slightly to 52.5 from January’s 52.4.  Goss said prices for raw materials and supplies, as reported by regional supply managers, are rising at a pace that gives the Federal Reserve flexibility in terms of the need for rate changes at their upcoming March meetings.

In February, supply managers were asked about the impact of an implementation of a March Federal Reserve rate increase. Approximately 25.4% said a rate hike would have a negative impact on their business while 3.9% said that they anticipate positive impacts from any rate increase. The remaining 70.7% expect no impact from a March Federal Reserve rate hike.

Looking ahead six months, economic optimism, as captured by the February business confidence index, climbed to 46.8 from January’s 42.2.

“Falling and/or weak agriculture and energy commodity prices, along with global economic uncertainty, continue to restrain supply managers’ expectations of future economic conditions,” said Goss.

In another sign of a sinking economic outlook, supply managers reduced their inventory levels for the month at a somewhat faster pace. The February inventory index, which tracks the change in the level of raw materials and supplies, dropped to 48.4 from 49.3 in January.

The new export orders improved to a still weak 46.1 from 40.0 in January.  The import index for February slipped to 50.1 from January’s 53.1.

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

Other components of the February Business Conditions Index were new orders at 52.5, up from 43.7 in January; production or sales moved higher to 54.2 from January’s 45.3; and delivery speed of raw materials and supplies dipped to 53.2 from last month’s 53.9.

Nationally, the Institute for Supply Management’s latest PMI report also released Monday shows economic activity in the manufacturing sector contracted in February for the fifth consecutive month while the overall economy expanded for the 81st consecutive month.

The February PMI registered 49.5%, an increase of 1.3 percentage points from the January reading of 48.2%.

“Comments from the panel indicate a more positive view of demand than in January, as 12 of our 18 industries report an increase in new orders, while four industries report a decrease in new orders,” said ISM economist Bradley Holcomb.

According to the monthly national survey on the manufacturing sector, the New Orders Index registered 51.5%, the same reading as in January. The Production Index registered 52.8 percent, 2.6 percentage points higher than the January reading of 50.2%. The Employment Index registered 48.5 percent, 2.6 percentage points above the January reading of 45.9%.

Additionally, inventories of raw materials registered 45%, an increase of 1.5 percentage points above the January reading of 43.5%. The Prices Index registered 38.5 percent, an increase of 5 percentage points above the January reading of 33.5%, indicating lower raw materials prices for the 16th consecutive month.

Of the 18 manufacturing industries, nine are reporting growth in February, the survey said.