Mountain States Leading Economic Indicator Declines for May: Companies Anticipate Less Construction

May survey results at a glance:
· Leading economic indicator dips to still healthy level.
· New export orders important growth factor.
· Approximately one in five companies reported expanding real estate space utilization over the past six months.
· Only one in twenty companies expects to expand real estate space utilization with new construction and/or leasing over the next six months.

For the nineteenth straight month, the overall index for the Mountain States region, a leading economic indicator for the three-state area of Colorado , Utah and Wyoming , advanced above growth neutral 50.0. Supply managers report that despite higher commodity prices restraining growth for some companies, firms continue to experience healthy economic activity. This growth is expected to continue through the third quarter of this year.

Overall Index: The overall index, or Business Conditions Index, which ranges between 0 and 100, dipped to a still healthy 57.5 from 58.6 in April. An index of 50.0 is considered growth neutral. The overall index, or 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 by the national Institute for Supply Management.

“While higher commodity prices have cooled regional growth a bit, our survey points to a healthy expansion in the months ahead, with exports making a significant contribution to growth. We are beginning to see high energy prices cut into economic growth for some firms even as higher energy and agricultural commodity prices improve the outlook for businesses linked to the energy sector and agriculture,” Goss Institute for Economic Research Director Dr. Ernie Goss said today.

The Goss Institute conducts the monthly survey for Supply Management Institutes in the three states comprising the Mountain States region. Goss also directs Creighton University ’s Economic Forecasting Group and is the Jack A. MacAllister Chair in Regional Economics (http://www.ernestgoss.com/aboutus.html).

Employment: The May employment index advanced to 54.9 from April’s tepid 51.8. “Job growth was especially strong for firms more dependent on international sales and those with ties to agriculture. The Federal Reserve’s (Fed’s) weak dollar policy, assisted by QE2 and a funds rate hovering around zero percent, has bolstered commodity prices and economic prospects of firms selling internationally. The Fed’s interest rate and money policies have weakened the dollar and made U.S. goods much more competitively priced abroad,” said Goss.

Wholesale Prices: The prices-paid index, which tracks the cost of raw materials and supplies, dipped to a still inflationary 85.4 from April’s record high 90.0. “Just as the Fed’s weak dollar policy has bolstered sales abroad, it has pushed domestically produced commodity prices higher and increased the price of imported raw materials and supplies,” said Goss.

“We continue to record unacceptably high inflationary pressures at the wholesale level. Even though the Federal Reserve (Fed) indicated it would end its buying of long-term U.S. Treasury bonds, termed quantitative easing, this summer, I expect the Fed’s record low short-term interest rates to continue to weaken the dollar and push inflation, even at the consumer level, above the Fed’s comfort zone,” said Goss.

This month survey participants were asked how their firms have changed their real estate utilization over the past six months and how their real estate utilization will change for the next six months.

Approximately 20.8 percent indicated they had expanded real estate utilization while 8.3 percent reported reducing real estate utilization over the past six months. The remaining 70.9 percent indicated that their real estate utilization had not changed in the past six months.

“For the next six month period, only 5.0 percent indicated they expect their firm’s real estate space utilization to expand, while an equal 5.0 percent anticipate a reduction. The remaining 90 percent indicated their real estate utilization would not change over the next six months,” said Goss.

As one supply manager noted, “Home prices continue to drop like a rock. Commercial construction seems to be slowing except for a couple of large ongoing projects.”

Business Confidence: Looking ahead six months, economic optimism, captured by the confidence index, fell to 60.0 from 62.0 in April and 61.9 in March. “Despite significantly higher input prices, supply managers remain upbeat in their economic outlook. However, economic optimism is slipping a bit,” reported Goss.

Inventories: Supply managers in the three-state region added to inventories of raw materials and supplies for the month with a reading of 54.0, down from 58.0 in April. “This is the eighteenth straight month that we have recorded inventory growth. As a result of rising economic confidence, firms in the region continue to expand inventories in anticipation of growing sales in 2011,” said Goss.

Trade: Boosted by a cheap dollar making U.S. goods more competitively priced abroad and by an expanding global economy, regional export orders advanced with a May reading of 64.1, up from April’s 63.4 and March’s 62.6. The region’s import reading declined to 50.0 from April’s 53.4. “Supported by QE2 and record low short-term interest rates, imports continue to decline and exports remain on a healthy growth path,” said Goss.

Other Components: Other components of the May Business Conditions Index were new orders at 64.0, down slightly from 65.0 in April; production or sales at 59.7, down from 60.7; and delivery lead time at 54.7, down from 57.3 in April.

The Institute for Supply Management, formerly the Purchasing Management Association, has been formally surveying its membership since 1931 to gauge business conditions (www.ism.ws). The Goss Institute uses the same methodology as the national survey. The 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 overall index is a mathematical average of new orders, production or sales, employment, inventories and delivery lead time.

The Creighton Economic Forecasting Group has conducted the monthly survey of supply managers in Colorado, Utah, and Wyoming since 1994 to produce leading economic indicators of the Mountain States region. The Goss Institute assumed operation of the survey in August of 2008, working with NAPM-Utah (www.napmutah.org) and NAPM-Western Wyoming (http://www.ism.ws/sites/westwyoming/index.htm).

Colorado: The state’s leading economic indicator, based on a monthly survey of supply managers in the state, advanced for May. The overall index for May, termed the Business Conditions Index, jumped to 62.9 from 53.8 in April and 59.6 in March. Components of the Business Conditions Index for May were new orders at 81.9, production or sales at 79.5, delivery lead time at 49.6, inventories at 45.1, and employment at 58.4. “Healthy energy commodity prices continue to boost growth in the state’s large energy sector while expanding exports remain an important contributor to Colorado’s durable goods manufacturing growth. On the other hand, non-durable goods manufacturing firms in the state are experiencing little new growth. However, the construction industry remains the biggest impediment to overall state growth,” reported Goss.

Utah: The state’s overall index, or Business Conditions Index, a leading economic indicator, once again remained above growth neutral 50.0. Based on the monthly survey of the membership of NAPM-Utah (www.napmutah.org), the overall index slipped to 55.4 from April’s solid 56.9. Components of the Business Conditions Index for March were new orders at 58.7, production or sales at 58.8, delivery lead time at 54.0, inventories at 51.5, and employment at 54.2. “Both durable and non-durable goods producers in the state are experiencing very healthy growth and growth prospects. Firms even report stabilizing construction activity although it remains significantly below pre-recession levels,” said Goss.

Wyoming: The state’s leading economic indicator from a survey of supply managers in the state climbed above growth neutral for the nineteenth straight month. The index, termed the Business Conditions Index, declined to a still healthy 62.5 from 67.5 in April and 69.0 in March. Supported by NAPM-Western Wyoming (http://www.ism.ws/sites/westwyoming/index.htm), surveys over the past several months point to an expanding state economy for the first half of 2011. Components of the overall index for May were new orders at 76.5, production or sales at 54.5, delivery lead time at 60.2, inventories at 66.8, and employment at 54.5. “While construction activity in the state has not returned to pre-recession levels, it has been advancing over the past six months. Contrary to Colorado and Utah, Wyoming’s non-durable goods manufacturers are out-growing their durable goods counterparts. For more than 12 months, Wyoming’s energy linked firms, other than natural gas, have been driving growth higher for the state,” reported Goss.

June survey results will be released on July 1.