Arkansas, midwest U.S. economic growth stalls in August amid tariff, trade turmoil

The highly watched economic indicator for Arkansas and several other midwest states slumped to its lowest level in nearly three years amid concerns that ongoing tariffs and trade issues are being fully absorbed into the U.S. economy.

Creighton University’s Mid-America Business Conditions Index for August reported Tuesday (Sept. 3) that the regional indicator fell below growth neutral for the first time since November 2016. The economic snapshot, which ranges between 0 and 100, slumped to 49.3 from July’s 52.0. After 32 straight months of above growth neutral readings, the region’s overall index moved below 50.0 in August.

“The regional economy expanded at a slower pace than the rest of the nation for the first eight months  of 2019,” said Ernie Goss, director of Creighton University’s Economic Forecasting Group In Omaha, Neb. “Weakness in the region’s farm and manufacturing sectors produced by tariffs and a global economic slowdown pulled regional growth below that of the nation. Based on our manufacturing survey over the past several months, I expect overall growth to slow and potentially move into negative territory in the months ahead.”

The August score for Arkansas fell to 48.2 from July’s 51.0.  Components of the index from the monthly survey of supply managers were new orders at 45.9, production or sales at 52.4, delivery lead time at 58.8, inventories at 41.6, and employment at 42.3.

“U.S. Bureau of Labor Statistics data indicate that Arkansas manufacturing workers ranked second in the nine-state region with a 5.8% increase in hourly earnings over the past 12 months,” said Goss. “In terms of job growth, both durable and nondurable manufacturers in the state experienced solid growth over the past 12 months. However, the state’s manufacturing sector lost jobs in August …”

The Creighton University report mirrors the national Purchasing Managers Institute (PMI) monthly survey that was also released Tuesday, posting a subdued 50.3 in August, slightly down from 50.4 in July. IHS Markit Chief Business Economist Chris Williamson said the overall slowdown in the manufacturing sector highlighted the least marked improvement in the health of the blue collar factory jobs since the depths of the financial crisis in September 2009.

“August PMI indicates that US manufacturers are enduring a torrid summer, with the main survey gauge down to its lowest since the depths of the financial crisis in 2009,” said Williamson. “Output and order book indices are both among the lowest seen for a decade, indicating that manufacturing is likely to have again acted as a significant drag on the economy in the third quarter, dampening GDP growth.”

DECLINING METRICS
Among key metrics for the regional economy, there was near across-the-board neutral growth in all sectors. For example, the August employment index fell to 45.1, its lowest level in 34 months, from 56.3 in July. The monthly report noted that one supply manager reported that tight labor markets are making it difficult to expand, while another said, “We’re struggling to hire enough workers to meet our demand.”

“For the last 12 months, Mid-America employment growth has been 0.7% compared to a much higher 1.5% for the U.S.,” said Goss. “This month, as in July, approximately 40% of supply managers reported that the shortage of qualified workers was the greatest economic challenge for their company for the next 12 months.”

The wholesale inflation gauge for the month indicated reduced inflationary pressures with a wholesale price index of 63.4, down from 71.9 in July.  In August, six of 10 supply managers reported their customers would be paying the greatest share of tariffs. Goss added that tariffs to date only had modest impact on our wholesale inflation gauge but said there is still support for another Federal Reserve rate cut.

“I expect the Federal Reserve to reduce short-term interest rates again at its September meetings. Record low interest rates by global central banks and a strong U.S. dollar are pushing the Fed to continue reducing rates,” said the Creighton University economist.

ECONOMIC OPTIMISM
Looking ahead six months, economic optimism, as captured by the August Business Confidence Index, plunged to 45.0 from July’s 51.4. This is a 35-month low for the confidence reading.

“I expect business confidence to depend heavily on trade talks with China, the Federal Reserve’s interest rate actions in the weeks and months ahead, and recession signals from the nation’s financial markets,” reported Goss.

Companies shrank inventories of raw materials and supplies for the month with the August inventory index plummeting to 41.5 from July’s 46.0. The regional trade numbers were down again with both export orders and imports falling. The new export orders index sank to 39.6, down from July’s 44.7, and the import index slumped to 42.3 from 43.8 in July.

“Two-thirds of our supply managers indicated that the trade war and tariffs were having negative impacts on their firm,” Goss reported.

Other components of the August Business Conditions Index were new orders at 48.8, down from July’s 51.3; the production or sales index was unchanged from July’s reading 52.6; and speed of deliveries of raw materials and supplies index at 58.6, was up from last month’s 53.8 reading.

The Commerce Department will release its July trade figures on Wednesday following a deficit showing of $55.2 billion in June. On Friday, the BLS with release the August unemployment report. Economists surveyed by The Wall Street Journal forecast the U.S. economy added 149,000 to payrolls in August, with the unemployment rate holding steady at 3.7%.