Monday, July 03, 2006

Survey Shows Largest Slump since 1999

The Mid-America Business Conditions Index took its largest one month tumble in more than six years in June with inflationary pressures showing few signs of weakening, according to the monthly survey of supply managers and business leaders in the nine-state region conducted by Creighton University. While the overall index remained above growth neutral 50.0, it plummeted to 57.9, its lowest level since December of 2005, and down from May’s 65.7.

The 17 Federal Reserve rate hikes and higher energy prices are beginning to slow the regional economy. While I do expect the region to continue to expand for 2006, it is clear that second half growth will be significantly less than was experienced in the first six months.

Inflationary pressures continue for the region despite the downturn in the overall index. While the prices-paid index declined slightly at 81.9, it still indicates significant inflationary pressure at the wholesale level. All eyes will be on the Fed when it meets again in August. At this point in time, I expect the Fed to cease raising rates as forthcoming data confirm a slowing economy. However, it will depend on the Fed’s interpretation of the economic data released between now and August 8.

The regional employment index declined to 60.2 from May’s record 65.5. The nine-state region has added 103,000 jobs, or an annualized rate of 1.6 percent. Based on our survey, I expect the region to add 61,500 jobs in the second half of 2006, or an annualized growth rate of 1.0 percent.

Rising interest rates and high energy prices cut into supply managers’ economic outlook six months from now. The confidence index declined to 57.3, its lowest level since November 2005, when post-Katrina concerns pushed the economic outlook lower.

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