Arkansas economy takes step back on manufacturing, energy sector woes

Business growth in Arkansas lost a step in April as a leading economic indicator for the region shows the state’s manufacturing, farming and energy sectors continue to shed jobs and affect overall economic expansion.

In April, Arkansas’ overall business index dipped below growth neutral to 49.5 from March’s 51. Components of the index from the monthly survey of supply managers were new orders at 50.7, production or sales at 50.1, delivery lead time at 52.4, inventories at 49.7, and employment at 44.9, according to a highly-watched Creighton University Mid-America Business Conditions index.

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.

“Weakness among the state’s durable goods manufacturers more than offset slight gains for nondurable goods producers for the month,” said Ernie Goss, director of Creighton University’s Economic Forecasting Group and chair of regional economics in the Heider College of Business. “Over the last 12 months, Arkansas manufacturers shed 2,500 jobs, or approximately 1.6%, of overall manufacturing jobs.”

REGIONAL ECONOMY SEES ‘ANEMIC’ BUT STEADY GROWTH
Regionally, the April index fell slightly to a weak 50.1 from March’s 50.6. Over the past several months, the regional index, much like the national reading, has indicated the manufacturing sector is experiencing anemic, but stabilizing, business conditions.

“A somewhat weaker U.S. dollar, making U.S. goods more competitively priced abroad, contributed to stabilizing business conditions across the region.  At the same time continuing weakness in the region’s agriculture and energy sectors remains an obstacle to improving overall growth,” Goss said.

The regional economic report follows last week’s disappointing news that the nation’s economy had decelerated for the third straight quarter. According to the “advance” estimate released by the Bureau of Economic Analysis released on April 28, real gross domestic product increased at a weak of 0.5% in the first quarter of 2016, well below the 2% and 1.4% growth in the third and fourth quarters of 2015, respectively.

Over the past several months, the regional index, much like the Institute for Supply Management’s national Purchasing Managers’ Index (PMI), has indicated that the Mid-America manufacturing sector is experiencing tepid but steady economic growth across the Mid-America states, including Arkansas.

The regional employment gauge remained below growth neutral falling to 45.0 from March’s 45.9 as manufacturers in the region continue to shed jobs even as the overall regional economy adds jobs, albeit at a slow pace.

Over the past year, the region’s manufacturing sector has lost approximately 1.9%, or roughly 26,000, manufacturing jobs. The losses in manufacturing have spilled over into the broader regional economy, and reduced overall annualized regional employment growth from 1.5% to 0.7% over the past year.

“I expect the broader economy to continue to add jobs, but at an even slower pace,” said Goss. “Every state in the region, except for Minnesota, has lost manufacturing jobs over the past 12 months with North Dakota and Oklahoma accruing the largest percentage of losses.”

The wholesale inflation index for April rose slightly to 62.4 from March’s 62.2, its highest level since June of last year, and up significantly from February’s 52.5. Goss said prices for raw materials and supplies, as reported by regional supply managers, are rising at a pace.

“If matched in future months, (they) will push the Federal Reserve to move short-term interest rates up at a pace higher than currently expected,” Goss said.

CONSUMER CONFIDENCE DIPS
Looking ahead six months, economic optimism, as captured by the April business confidence index, slipped to 51.3 from March’s 51.4. Improving prices for manufactured products and commodities over the last several months pushed the index above growth neutral over the last two months, Goss said.

The April inventory index, which tracks the change in the level of raw materials and supplies, declined to growth neutral 50 from 50.8 in March. New export orders improved to a strong 57.6 from 50 in March, while the import index for April expanded to 58 from March’s 55.4.

“Recent weakness in the U.S. dollar, making U.S. goods more competitively priced abroad, sent the export reading much higher for the month. At the same time, growth in regional manufacturing, though slight, pushed supply managers to increase buying from abroad,” said Goss.

Other components were new orders at 51.3, down from 53.6 in March; production or sales dipped to 50.7 from March’s 50.8; and delivery speed of raw materials and supplies increased to 53.7 from last month’s 52.1.

Nationally, the ISM’s April manufacturing index also released on Monday registered 50.8%, a decrease of 1 percentage point from the March reading of 51.8%. Manufacturing remained above growth neutral in April as the PMI registered 50.8%, but decreased of 1 percentage point from the March reading of 51.8%.

Still, the manufacturing sector has seen two straight months of positive growth following five consecutive months of contraction in factory activity. According to ISM, an index reading above 43.2% over a period of time generally indicates an expansion of business activity in the U.S. The April index indicates growth for the 83rd consecutive month in the U.S. economy.

“The past relationship between the PMI and the overall economy indicates that the average PMI for January through April (50.1%) corresponds to a 2.2% increase in real gross domestic product (GDP) on an annualized basis,” said Bradley Holcomb, economist and chair of the ISM’s Manufacturing Business Survey Committee.