November survey results at a glance:
*Business Conditions Index declines for the fifth time in seven months
*Inflation gauge drops for fourth straight month
*November employment index declines to its lowest level since May 2003
*New export orders are up as imports decline
Inflationary pressures and economic growth in the Mid-America region continue to slow, according to the November Business Conditions Survey of supply managers and business leaders in the nine-state region. The overall Business Conditions Index, a leading economic indicator, declined to 54.1 from October’s 55.1 and September’s 57.0. Consistent with slower economic growth, inflationary pressures cooled as well. The prices-paid index, which tracks the cost of raw materials and supplies, dropped for the fourth straight month to 69.4, down from 73.1 in October and September’s 75.2.
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Despite the optimistic report from the Fed’s Beige Book this week, I expect growth to continue to slow well into 2007. While Federal Reserve Chairman Bernanke voiced concern this week that inflationary pressures are still lurking, I think the likelihood of a rate hike at its next meeting on Dec. 12 is less than 5 percent. Anemic growth will once again, in my judgment, force the Fed to reduce short-term rates, just like it did in 2000 when the Fed raised rates to only reduce them seven months later just before the beginning of the recession. However I don’t expect the Fed to move the rates lower until the second quarter of 2007 at the earliest.
Survey participants also reported weaker hiring for the region. The November employment index slumped for the sixth straight month to 50.5, its lowest level since May 2003, and down from October’s 54.2 and September’s 56.5. I think that it is very likely that government-reported employment growth for the region will dip into negative territory as early as December 2006.
November survey results were much weaker for the heavy manufacturing sector in the region. October’s durable goods orders from the Census Bureau report were not good. Our survey indicates that the national durable goods orders for the November report will also be weak when it is released on Dec. 22. Our regional survey, the national Institute for Supply Management survey, and low long-term interest rates are all sending the same message; the economy is very likely to slow significantly below the goals of the Fed in the months ahead.