Friday, April 08, 2005

Prepare for Economic Slowdown

Our latest survey of supply managers in the 9 state Mid-American region contained some regional economic negatives and is a harbinger of national economic events for the next two quarters. The March survey of 800+ firms shows that higher oil prices and interest rates are beginning to take a toll on confidence, but have yet to retard current economic conditions. The index, a leading economic indicator, stood at 61.3 but virtually unchanged from February’s vigorous 62.3 and well above growth neutral 50.0 (

Rising oil prices and higher prices for other imported goods pushed the regional prices-paid index to 79.6, but down slightly from February’s 79.7. Not surprisingly, the seven Federal Reserve rate hikes since last June have yet to cool inflationary pressures in the economic pipeline. Members of the Federal Reserve Open Market Committee continue to express the belief that current short-term rates are accommodative and below equilibrium. I expect another rate hike at the Fed’s next meeting May 3. However, this rate hike is more likely to be ½% than the previous seven ¼% increases.

Despite a weaker U.S. dollar pushing the price of imported goods higher and exported goods lower, the regional import index stood at an unexpectedly lofty 58.1 and the new export index declined to 53.0 from February’s 55.3. Higher oil prices and weakness among U.S. trading partners account for this conundrum and does not bode well for future trade deficits, at least for the near term. Surveys over the past several months indicate that the nation will likely continue to experience high trade deficits contributing to a further weakening of the dollar.

The regional employment index declined for March, but stood at a healthy 62.4. March new orders and production stood at a brisk 66.7 and 64.2, respectively. Heavy or durable goods manufacturers accounted for a large share of March’s strength. On the other hand, non-durable goods manufacturers, particularly food processors, documented somewhat weaker hiring and new orders in comparison to February.

My recommendation---prepare for the economic slowdown in second half of 2005.

Ernie Goss

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