MID-AMERICAN ECONOMY HEATS UP WITH THE WEATHER

Unseasonably warm weather helped push the overall business conditions index for the Mid-America region forward for February, while inflationary pressures waned, according to the monthly survey supply managers and business leaders in the nine-state region.
The overall index for February inched higher to 59.9 from January’s healthy 59.8 and well above December’s solid 56.1. The Mid-American region includes the states of Arkansas, Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, Oklahoma and South Dakota.

It is certainly clear that record warm weather for much of the region for January and February played an important role in supporting the economy as businesses paid less than anticipated for heating and construction projects normally stymied by winter weather advanced.

At the same time, the region’s prices-paid index, which measures inflation at the wholesale level, dropped to 74.3, the fifth consecutive decline moving to its lowest level since August of last year. Despite modest inflationary pressures at the regional and national level, I expect the Federal Reserve to once again raise rates at its next meeting on March 27-28, even though I had previously indicated that there would not be an increase from Bernanke’s first Open Market Committee meeting. The likelihood of at least a 25 basis point (0.25 percent) increase is now 100 percent. The market is now looking ahead to the following Fed meeting on May 10 and I think the probability of a rate hike at the May meeting is more than 50 percent. However, the real danger is that the warm weather may have fooled many into thinking the economy is doing better than it is.

The business confidence index climbed to 64.6, its highest reading since February 2005, and up from January’s 59.7. The confidence index gauges survey participants economic outlook six months out. An index below 50.0 indicates a negative outlook. I think recent national debates involving devoting more resources to renewable energy production has had positive and significant impacts on businesses in this part of the country. For example, greater reliance on ethanol by the U.S. will make many areas in the region clear economic winners.

EPG