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Index Shows Slower Growth: Tariffs Impact Two-Thirds of Firms
USAgNet - 08/06/2018

The July Creighton University Mid-America Business Conditions Index, a leading economic indicator for the nine-state region stretching from Minnesota to Arkansas, fell to a solid level continuing to point to positive, but slower, growth for the next three to six months.

Overall index: The Business Conditions Index, which ranges between 0 and 100, declined to 57.0 from June's 61.8 and May's 67.3. This is the 20th straight month the index has remained above growth neutral 50.0, but the second straight month that the index has fallen.

"The regional economy continues to expand at a healthy pace with manufacturing growth of approximately 2.6 percent over the past 12 months compared to a lower 2.3 percent for the U.S.," 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.

"However, I expect expanding tariffs, trade restrictions, and rising short-term interest rates from a more aggressive Federal Reserve to slow growth to a more modest, but still positive pace," said Goss.

Employment: July employment decreased to 58.9 from June's 61.9. "Overall employment growth in the region over the past 12 months has been healthy but expanding at a rate below that of the nation," Goss reported. "On the other hand, manufacturing job growth has been stronger in the region than the rest of the U.S."

Wholesale Prices: The wholesale inflation gauge continues to indicate elevated inflationary pressures with an index of 83.8, but down from 86.9 in June.

Both Creighton's regional wholesale inflation index and the U.S. inflation gauge are elevated. Over the past 12 months, U.S. wholesale prices have expanded by 3.1 percent, the fastest growth since 2012. At the consumer level, the consumer price index advanced by 2.9 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. This trend has already begun to push consumer inflation higher," Goss said. "As a result, in my judgment, the Federal Reserve's interest rate-setting committee will raise short-term interest rates by one-quarter of one percentage point (25 basis points) at its Sept. 26 meeting."

Approximately 46.8 percent of supply managers indicated that recent trade tariffs and restrictions had already begun to have negative impacts on buying from abroad.

One supply manger reported that tariffs on Canadian steel were having a bigger effect on his firm than expected.

Almost two-thirds, or 63.1 percent of supply managers reported that recent tariffs and trade restrictions have had, or will have, negative impact on their companies. Despite this negative impact, 32.6 supported raising tariffs even higher.

Confidence: Looking ahead six months, economic optimism, as captured by the July Business Confidence Index, climbed to a strong 63.9 from June's 59.8.

"Despite trade tensions and skirmishes, healthy profit growth, still low interest rates, and lower tax rates, supported robust business confidence," reported Goss.

Inventories: Companies expanded their inventories of raw materials and supplies, but at a slower pace than in June. The July inventory index declined to 53.3 from June's 58.6.

Trade: The regional new export orders index sank to 53.2 from 60.0 in June, and the import index rose to 60.1 from June's solid 56.5.

"Positive export orders and imports may be the result of firms in the U.S., and among trading partners, advancing purchasing in anticipation of rising trade restrictions and tariffs," said Goss.

However, as reported by one supply manger, "President Trump's decision to tackle the trade deficit is the right one."

Other components: Components of the July Business Conditions Index were new orders at 55.6, down from 64.7 in June; the production or sales index declined to 57.8 from June's 64.7; and speed of deliveries of raw materials and supplies rose to 59.6 from last month's 58.3.

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 July Business Conditions Index for Iowa sank to a solid 55.9 from June's very healthy 62.6. Components of the overall index from the monthly survey of supply managers were new orders at 53.6, production or sales at 58.8, delivery lead time at 58.4, employment at 57.1, and inventories at 51.6. "U.S. Census data indicate that Iowa exported $4.5 billion in agriculture and food products in 2017. This represented 34.3 percent of total 2017 state exports, or third highest in the nine-state region," said Goss.

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