Arkansas, regional economic falls behind rest of nation as manufacturing downturn slows job growth

Arkansas and the rest of the Mid-America regional economy are stuck in reverse as the yearlong downturn in the manufacturing, farming and energy sectors is spreading across other business sectors.

That analysis comes from Creighton University’s Mid-America Business Conditions Index released Monday (Oct. 3). Ernie Goss, director of Creighton’s Economic Forecasting Group and chair of regional economics in the Heider College of Business, said economic growth in the nine-state region stretching from Arkansas to North Dakota slumped significantly in September.

The September Business Conditions Index, which ranges between 0 and 100, fell to 45.5 from August’s 47.8 and July’s 47.6. This is the third straight month the index has moved below growth neutral 50. Like the national PMI Manufacturing survey of supply managers, the regional survey is indicating that the manufacturing sector is experiencing negative growth.

“Weakness among manufacturers linked to agriculture and energy continue to weigh on regional economic conditions. Due to the heavy dependence of the region on these two sectors, I will expect to see the regional economy to continue to underperform the national economy,” Goss said. “Over the past 12 months, for example, the region has experienced nonfarm job growth of 1.1% compared to 1.7% for the U.S. This gap is likely to continue for the remainder of 2016.”

A second report released Monday showed manufacturing sector improvement. Economic activity in the manufacturing sector expanded in September following one month of contraction in August, and the overall economy grew for the 88th consecutive month, according to the Institute for Supply Management’s PMI Manufacturing Index. The September PMI registered 51.5%, an increase of 2.1 percentage points from the August reading of 49.4%.

A reading above 50% indicates that the manufacturing economy is generally expanding; below 50% indicates that it is generally contracting.

The regional economic snapshot from Creighton Economic Forecasting Group, which mirrors the national Purchasing Managers Institute (PMI) monthly survey, has been conducted from a 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.

In Arkansas, the September Business Conditions Index declined to 45.7 from 47.5 in August. Components of the index from the monthly survey of supply managers were new orders at 41.2, production or sales at 45.1, delivery lead time at 42.6, inventories at 52.3, and employment at 47.4.

“As in previous months, job losses for durable goods producers more than offset gains for nondurable goods manufacturers for September,” said Goss.

GAP GROWS BETWEEN MANUFACTURING, NON-MANUFACTURING JOBS
Regionally, the nine-state employment gauge indicates the manufacturing sector continues to lose jobs as the index, which rose slightly, remained below growth neutral for the fourth straight month. The job gauge rose to a weak 46.8 from 44 in August.

Over the last 12 months, U.S. Bureau of Labor Statistics data indicate the region’s manufacturing sector lost almost 20,000 jobs while regional nonmanufacturing added almost 109,000 jobs. In the same period, regional manufacturing employment declined by 1.4%t, but regional nonmanufacturing employment expanded by 1.1%.

“The growth gap between regional manufacturing and nonmanufacturing continues to expand,” Goss said.

Eeconomic optimism, as captured by the September business confidence index, increased to a frail 48.5 from August’s 45.4.

“Global economic uncertainty and weakness in the region’s agricultural and energy sector are weighing on the business economic outlook of supply managers,” said the Creighton University economist.

The September inventory index, which tracks the change in the level of raw materials and supplies, plummeted to 40.1 from August’s 52.3. Goss said the bankruptcy of Hanjin Shipping was reported by supply managers as a factor restraining imports and inventory replenishment.

The new export orders index plunged to 33.8 from 50.1 in August while the import index fell to 43.4 from 45.8 in August. Other components of the September Business Conditions Index were new orders at 41.9, down from 44.4 in August; production or sales index was 45.7, up slightly from 45.2 in August; and delivery speed of raw materials and supplies rose to 53.1 from last month’s 52.9.

IMPACT OF FED RATE HIKE
The Creighton September survey also asked how supply managers expected a Federal Reserve rate hike to impact their firm’s profitability. More than one in five, or 23%, expect such a rate increase to have a negative effect on their firm’s revenue and profitability. On the other hand, 5% reported such an interest rate change would have a positive impact, with the remaining 72% expecting little or no impact.

“Even though wholesale price inflation remains in a range indicating only modest upward price pressures, I expect the Federal Reserve to raise rates at least once before the end of the year. The core consumer price index, which excludes food and energy, has risen above 2% for 10 straight months,” said Goss.