Overall economic index rises, confidence falls because of gas prices

OMAHA, Neb. -- The Mid-America region's overall economic index rose in August despite higher gas and oil prices causing a drop in confidence, a monthly survey of the region's supply managers and business leaders suggests.

The August index rose to 60.4, from 59.7 in July. The confidence index declined to 54.1, which is its lowest reading since the 2001 recession. Creighton University economics professor Ernie Goss said the effects of Hurricane Katrina will likely drive confidence down further.

"The tragedy in New Orleans and the U.S. Gulf Coast will certainly contribute to higher prices in the months ahead," Goss said.

Goss said, however, that the massive rebuilding effort to come will eventually have a positive effect on U.S. growth in gross domestic product.

The prices-paid index, which monitors wholesale-level inflation, jumped to 73.1 from July's 60.9. The increase is the largest one-month jump since the survey began in 1994, Goss said.

The higher prices are blocking job growth in industries such as vehicle manufacturing, food processing, and computer and electronic manufacturing. The lack of growth was evidenced by the new-jobs index, which dropped to 57.5 from 60.7 in July.

"On the other hand, hiring in durable-goods manufacturing and value-added services remains vigorous even with the higher energy prices," said Goss, who is director of the Creighton Economic Forecasting Group that conducts the survey.

The group has surveyed supply managers in a nine-state region each month since 1994 to gauge the Mid-America economy. Arkansas, Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, Oklahoma and South Dakota are the states involved in the survey.

In 1931, the Institute for Supply Management, formerly the Purchasing Management Association, began measuring business conditions by surveying its membership. The same methodology is used by the Creighton group.

The overall index, called the Business Conditions Index, ranges from 0 and 100. An index of more than 50 indicates an expansionary economy over the next three to six months.

The Federal Reserve Open Market Committee raised short-term interest another quarter point in August, the tenth increase since last June. Interest rates are at their highest since August 2001.

The open market committee "now faces the real dilemma of raising interest rates to combat inflation just as higher energy prices also constrain growth," Goss said. "The Bush administration's decision to tap the nation's strategic oil reserves will certainly make it easier for the Fed to raise rates again at its Sept. 20 meeting, and I expect them to do just that."

The new-orders index rose in August to 62.0 from 61.1 in July. Production rose to 67.1 from 64.2.

New export orders rose to 56.9 from July's 56.5 but imports increased to 58.5 in August.

"In past months, the oil imports have driven our import reading higher, even as businesses report solid exports," Goss said. "Based on our survey and other government data, I see little improvement in the nations trade deficit for the remainder of the year."

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On the Net:

Mid-America Business Conditions Survey: http://www.outlook-economic.com