Midwest economy strong; inflation looming

The Midwest economy was strong for a fourth straight month in May, but high gasoline prices helped fuel inflationary pressures, according to a survey of manufacturing executives.

The overall index in the Mid-America Business Conditions Index declined slightly in May to 67.3 from April's record 70.3, but it was above 60 for a fourth straight month, Creighton University economics professor Jim Knudsen said Tuesday.

An index reading above 50 indicates expansion, while one below 50 indicates a contraction in manufacturing activity.

Solid economic growth for the region is expected at least through this year's third quarter, Knudsen said.

Nationally, manufacturing activity expanded for the 12th consecutive month in May, according to a similar survey done by the Institute for Supply Management. The national manufacturing index advanced to 62.8 in May from 62.4 in April.

Knudsen surveys business leaders and supply managers in a nine state region, including Nebraska, Iowa, Arkansas, Kansas, Minnesota, Missouri, North Dakota, Oklahoma and South Dakota.

The prices paid index for manufacturing materials, including steel, metal and energy products, was an unacceptably high 86.6, though a bit lower than the record 89.8 for April, Knudsen said.

Inflationary pressures in the Midwest and nationally probably will lead the Federal Reserve Board to increase interest rates at its June meeting, especially if job gains are above the 100,000 mark when the employment report is released Friday by the Bureau of Labor Statistics, Knudsen said.

"We are beginning to see fallout from higher gas prices and cement shortages, along with continued higher commodity prices, which are beginning to reach the consumer," Knudsen said.

David Knight of Ole Hickory Pits in Cape Girardeau said his company has been able to absorb the extra costs and surcharges that the high gas prices have brought on. However, Knight said that costs of long-term trends like current gas prices will inevitably make their way to consumers.

Steve Leus, plant manager for Buzzi Unicem USA, Midwest Division in Cape Girardeau, said other local businesses have also been feeling the pressure. Leus' company manufactures cement and masonry, and he said that the soaring cost of fuel is affecting more than just the cost of getting raw materials by truck; it is also hitting his profit margin by way of increasing cost of fuel oil to supplement the coal supply in his masonry manufacturing operation.

In addition to manufacturing costs, many area manufacturers like Cape Girardeau's Thorngate Ltd. are paying at the pump themselves. The cost of delivery of the manufacturer's own product by truck is also going up, putting more pressure on the company's bottom line.

But, despite rising prices and possible interest rate increases, confidence in the economy remained high at 71.4, Knudsen said.

Staff writer Tony Rehagen contributed to this report.