Business growth across the state took a step back in June, but a highly-watched economic indicator for the Mid-America region that includes Arkansas predicts Great Britain’s exit from the European Union will have minimal effect on the state economy.
According to Creighton University Mid-America Business Conditions Index released Friday (July 1), business growth in Arkansas lost momentum and turned back below “growth neutral” in June as the state’s economy continued to see weak growth, highlighted by an ongoing downturn in the manufacturing sector.
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 forecasting group’s 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.
Arkansas’ overall index for June, or leading economic indicator, fell to 48.5 from May’s 52.7. Components of the index from the monthly survey of supply managers were new orders at 45.6, production or sales at 46.5, delivery lead time at 53.0, inventories at 52.1, and employment at 45.3.
However, economist Ernie Goss, director of Creighton’s Economic Forecasting Group and chair of regional economics in the Heider College of Business, said Arkansas will likely sidestep any broad fallout from the Britain’s exit from the EU, or the so-called Brexit.
“In 2015, Arkansas exported $170 million in goods to Great Britain representing less than 0.14 percent of the state’s gross domestic product,” Goss said. “Thus, significant increases in the value of the dollar versus the pound sterling, or a British recession will have only a small, negative impact on the state economy.”
Regionally, the June Business Conditions Index, fell to 50.1 from May’s 52.1. This is the fifth consecutive month the reading has remained above growth neutral. Components of the June Business Conditions Index were new orders at 46.8, down from 50.7; production or sales sank to 47.6 from May’s 52.9; and delivery speed of raw materials and supplies rose to 55.4 from last month’s 52.1.
Over the past several months, the regional index, much like the national Institute for Supply Management (ISM) reading, has indicated the manufacturing sector is experiencing anemic business conditions.
“The region’s manufacturing sector is expanding, but at a slow pace as gains for nondurable goods producers more than offset continuing losses for regional durable goods manufacturers,” the report noted.
Most survey participants this month completed the survey before Great Britain citizens voted to exit the EU. In 2015, the region exported almost $2 billion in goods to Great Britain and imported approximately $1.9 billion for a relatively small regional trade surplus of almost $100 million.
“Thus, a British recession or weak British currency will not have a significant impact on the Mid-America economy. The larger impact on the regional economy would be a substantial strengthening of the dollar against a broad range of currencies,” said Goss.
The regional employment gauge once again slumped below growth neutral. The index fell to 46.1 from May’s tepid 51.4.
“While the region’s manufacturing sector has lost jobs over the last several months, the overall regional economy continues to add jobs but at a pace of roughly half that of this time last year,” said Goss.
Despite record unemployment in Arkansas and across the region, the eight-state employment gauge once again slumped below growth neutral. The index fell to 46.1 from May’s tepid 51.4.
“While the region’s manufacturing sector has lost jobs over the last several months, the overall regional economy continues to add jobs but at a pace of roughly half that of this time last year,” Goss explained.
The eight-state region’s wholesale inflation index expanded to its highest level since May of last year, to 66.7 for June and up from last month’s 62.4.
“Prices for raw materials and supplies, as reported by regional supply managers, are rising at a pace, if matched in future months, will push the inflation rate above the Federal Reserve’s target rate,” said Goss. “Despite all of the global risks, I expect the Federal Reserve to increase rates at least once in the second half of 2016.”
Looking ahead six months, economic optimism, as captured by the June business confidence index, improved to 51.9 from May’s 47.7. Goss said only a small share of survey participants completed the survey after the British Brexit vote.
“Thus, the recorded reading is higher than expected given the global economic uncertainty currently observed,” he said.
The June inventory index, which tracks the change in the level of raw materials and supplies, increased to 54 from May’s 52. On the trading front, new export orders fell to 47.6 from May’s 52.1. The import index for June tumbled to 47.8 from 50.1 in May. Goss said global economic uncertainty and weakness among our trading partners continue to weigh on export orders. At the same time, growth in regional manufacturing pushed supply managers to maintain buying from abroad, he said.
The 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 for more than 85 years by the highly-watched ISM’s Manufacturing Index also released on Friday.
ISM’s monthly gauge shows that U.S. that U.S. manufacturing activity expanded for the second straight month in June, rising from a reading of 51.3 in May to 53.2 in June.