After stable growth through the first half of 2016, business growth in Arkansas has slowed as manufacturers across the regional economy face difficulties in competing abroad because of the strong U.S. dollar.
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.
According to Creighton University’s Mid-America Business Conditions Index released Monday (Aug. 1), Arkansas’ overall index for July fell to 47.3 from June’s 48.5. Components of the index from the monthly survey of supply managers were new orders at 41.0, production or sales at 46.8, delivery lead time at 57.6, inventories at 44.3, and employment at 46.9.
An index reading greater than 50 indicates an expansionary economy over the course of the next three to six months.
“Job losses for durable goods producers more than offset gains for nondurable goods manufacturers for July,” said Ernie Goss, director of Creighton’s Economic Forecasting Group and chair of regional economics in the Heider College of Business.
Regionally, the June Business Conditions index, fell to 47.6 from June’s 50.1. This is the first time since January the reading has fallen below growth neutral. Over the past several months the regional index, much like the national Purchasing Managers Institute (PMI) survey, has indicated the manufacturing sector is experiencing weak to negative business conditions.
More than one-third, or 34.3%, of businesses report global economic conditions as the greatest factor weighing on company sales and business conditions over the past year.
“More than one-fifth of businesses, or 20.9%, named downturns in the farm economy as the largest factor slowing company sales and growth. Thus, the relative strength of the U.S. dollar, which has made regional manufactured goods less competitively priced abroad and pushed agriculture commodity prices lower, continues to slow regional manufacturing growth,” Goss said.
While the regional employment gauge improved for June, the reading remains below growth neutral. The index rose slightly to 46.9 from June’s 46.1.
“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 well below that of the nation and this time last year,” said Goss.
The wholesale inflation gauge remained in a range indicating modest inflationary pressures at the wholesale level. The prices-paid index declined to 60.8 in July from June’s 66.7. On average, supply managers expect the prices for their firm’s products to expand by 1.6% in the second half of 2016.
Goss said prices for raw materials and supplies, as reported by regional supply managers, are rising at a pace that, if matched in future months, will push the core inflation rate above the Federal Reserve’s comfort zone.
“The core consumer price index, which excludes food and energy, has risen above 2% percent for eight straight months,” said the Creighton University economist. “As a result, I expect the Federal Reserve to increase rates before the end of 2016.”
Looking ahead six months, economic optimism, as captured by the July business confidence index, sank to 47.0 from June’s 51.9. Global economic uncertainty, including June’s Brexit vote was a significant economic concern for a large share of supply managers in the survey, Goss said.
The July inventory index, which tracks the change in the level of raw materials and supplies, plummeted to 43.5 from June’s 54.0. On the trading front, the new export orders index surprisingly rose to 52.5 from June’s 47.6 and May’s 52.1. The import index for July expanded to 51.0 from 47.8 in June.
“Expansions among global trading partners more than offset a relatively strong U.S. dollar. A strong U.S. dollar makes U.S. goods less competitively priced abroad. However, I do expect the strength of the dollar to continue to weigh on export orders,” Goss said. “At the same time, the relatively strong U.S. dollar, making foreign goods more competitively priced in the U.S., boosted imports for the month.”
Other components of the July Business Conditions Index were new orders at 41.9, down from 46.8 in June; production or sales were 47.6 for July unchanged from June; and delivery speed of raw materials and supplies rose to 58.3 from last month’s 55.4.
The national PMI index for July will be released later today.