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Mid-America Index: 6 of 10 Supply Managers Report Negative Tariff Impacts
South Dakota Ag Connection - 11/05/2018

The October Creighton University Mid-America Business Conditions Index, a leading economic indicator for the nine-state region stretching from Minnesota to Arkansas, sank to its lowest level since President Trump took office, but remained above growth neutral, and continues to point to positive economic growth for the next three to six months.

Overall index: The Business Conditions Index, which ranges between 0 and 100, fell to 54.9 from September's strong 57.5. This is the 23rd straight month the index has remained above growth neutral 50.0, but dropped to the lowest reading since January 2017.

"The regional economy continues to expand at a healthy pace. However, as in recent months, shortages of skilled workers remain an impediment to even stronger growth. Furthermore, supply managers are reporting mounting negative impacts from tariffs and trade skirmishes. I expect expanding tariffs, trade restrictions, and rising short-term interest rates from a more aggressive Federal Reserve, to slow regional growth to a more modest, but still positive pace in the months ahead," said Ernie Goss, PhD, director of Creighton University's Economic Forecasting Group and the Jack A. MacAllister Chair in Regional Economics in the Heider College of Business.

In October, approximately 60.0 percent of the supply (purchasing) managers indicated that rising tariffs had made it more difficult, or expensive, to purchase from abroad. This is up from 40.8 percent recorded last month.

Employment: The October employment index sank to 52.2 from 56.2 in September and 58.5 in August.

"Overall manufacturing employment growth in the region over the past 12 months has been very healthy at 2.4 percent, compared to a lower 2.2 percent for the U.S. I expect this gap to close in the months ahead as regional job growth slows faster than national manufacturing job growth," Goss reported.

Wholesale Prices: The wholesale inflation gauge continues to indicate elevated inflationary pressures with an October index of 79.9, up from September's 76.1.

Both Creighton's regional wholesale inflation index and the U.S. inflation gauge are elevated. Tariffs and expanding growth, for example, have boosted steel prices by 12.2 percent over the past 12 months. At the consumer level, the consumer price index advanced by 2.3 percent over the past 12 months.

"I expect rising tariffs, trade restrictions, and higher oil prices to continue to boost wholesale and consumer inflation growth above the Federal Reserve's target," Goss said. "The Fed raised short-term interest rates by one-quarter of one percentage point last week. I expect an identical rate hike on December 19."

More than one-third, or 35.7 percent of supply managers, expect a December rate hike to have a negative impact on their business profitability.

As reported by one supply manager, "I consider tariffs the same as a price increase. If tariffs on steel and aluminum products from Euro and China are short term, then I expect no change to prices."

On average, supply managers expect to experience a 4.1 percent increase in the price of inputs and supplies over the next 12 months.

Confidence: Looking ahead six months, economic optimism, as captured by the October Business Confidence Index, fell to a still strong 59.6 from September's 68.0.

"In terms of business confidence, rising trade tensions, tariffs, and interest rates have reduced economic optimism among supply managers in the region," reported Goss.

Inventories: Companies cut inventories of raw materials and supplies for the month. The October inventory index sank to 47.9 from September's 56.3.

Trade: The regional new export orders index dropped to 51.5 from September's 53.1, and the import index plummeted to 48.7 from September's 57.2 and August's 58.1.

"We are beginning to track the negative impacts of the tariffs as the price of goods, both imports and exports, expands. Even with the NAFTA resolution, trade barriers and tariffs are slowing international sales," said Goss.

Other components: Components of the October Business Conditions Index were new orders at 57.8, down from 59.4 in September; the production or sales index at 56.5, down from September's 58.4; and speed of deliveries of raw materials and supplies index at 60.5, up from last month's 57.0.

The Creighton Economic Forecasting Group has conducted the monthly survey of supply managers in nine states since 1994 to produce leading economic indicators of the Mid-America economy. States included in the survey are Arkansas, Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, Oklahoma and South Dakota.

The forecasting group's overall index, referred to as the Business Conditions Index, ranges between 0 and 100. An index greater than 50 indicates an expansionary economy over the course of the next three to six months. The Business Conditions Index is a mathematical average of indices for new orders, production or sales, employment, inventories and delivery lead time. This is the same methodology, used since 1931 by the Institute for Supply Management, formerly the National Association of Purchasing Management.

The October Business Conditions Index for South Dakota climbed to 52.6 from 50.4 in September. Components of the overall index from the October survey of supply managers in the state were new orders at 53.8, production or sales at 54.3, delivery lead time at 53.6, inventories at 51.2, and employment at 49.9. "Over the past 12 months, South Dakota nondurable goods manufacturers added 500 workers for a 3.2 percent gain making the state number two among the nine states in terms of the rate of growth. During this same period of time, durable goods producers in the state boosted jobs by 1,000 for a 3.6 percent gain, pushing the state to number five among the nine states in terms of the rate of growth," reported Goss.

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