Wednesday, June 01, 2005

Economic Expansion to Continue

Each month we survey over 800 firms in nine states to obtain a gauge on the regional economy which includes Arkansas, Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, Oklahoma and South Daktoa. The overall index from the survey of supply managers (purchasing managers) is a leading economic indicator with an index above 50 pointing to economic growth in the next 3 to 6 months. The index from the May survey was 60.7 or significantly above growth neutral 50.0.

Moderating prices for steel and oil, along with cheap prices for imported goods, pushed the prices-paid index down to its lowest level since November 2003 with a May reading of 65.8, down from April’s 75.4. The prices-paid index tracks inflation at the wholesale level and has now declined for five straight months

Strong readings for the overall index combined with waning inflationary pressures signal that the regional economy is entering a zone often termed the ‘Goldilocks” economy-not too hot, but not to cool. Because of this I expect the fed to be less aggressive on rate hikes in the coming months. Despite this, and contrary to my April assessment, I place the likelihood of a rate hike at their June29/30 meetings at something over 80 percent.

Despite very positive reports from supply managers, the regional confidence index declined for the fifth consecutive month to 58.6, its lowest level since October 2002 and down from April’s 59.4. It’s difficult to determine the source of this decline, but it is clear that the hardening of trading positions among China, Europe and the U.S. is contributing to a less positive economic outlook six to nine months out. If the trading partners convert their current hard-hitting rhetoric to trade restrictions, I expect the Fed to remain biased to rate hikes to protect against higher inflation that would accompany trade limits.

Ernie Goss

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