Is index decline good?

0 Comments | Deseret News (Salt Lake City), Dec 2, 2006 | by Brice Wallace Deseret Morning News

When is a slipping business-conditions barometer a good thing?

Apparently when it portends long-term growth.

That's the conclusion of Ernie Goss, a Creighton University economics professor who puts together the Mountain States Business Conditions Index. The index indicated that Utah's 56.4 figure for November -- down from October's 65.6 and September's 66.5 -- was not cause for alarm.

"Rather than indicating weakness, the sharp decline in the overall index just means Utah's economy is moving to a more sustainable long-term growth path," Goss wrote in his report released Friday. "With the unemployment rate at its lowest level in more than 10 years, it is not surprising that firms in our survey are reporting unfilled positions due to labor shortages."

The index is based on a survey of supply managers and business leaders and uses the same methodology as a national report by the Institute for Supply Management. An index higher than 50 indicates an expansionary economy over the next three to six months.

Meanwhile, the country's manufacturing index slipped for the first time in almost four years, and its fall is firing warning flares for the job market, economists said on Friday. The ISM, based in Tempe, Ariz., said its manufacturing index came in at 49.5 in November, behind October's reading of 51.2.

Components of the overall Utah figure include 55.9 for new orders, production at 56.4, delivery lead time at 56.6, inventories at 56.9 and employment at 56.8.

The three-state Mountain region saw its overall index fall for a third straight month to 58.4 from October's 67.6 and September's 73.3. Colorado's figure rose to 55.6 from October's 53.8. Wyoming's grew to 90.9 from October's 81.4.

"Unemployment rates are low by historical standards throughout the region," Goss wrote. "Despite the labor shortages reported across Utah and Wyoming, I expect job growth in the region to more than double the nation's job growth until the beginning of the second quarter of 2007.

"November job growth in the region was healthy even as labor shortages slowed growth in selected industries and areas in the region. The employment index advanced to a vigorous 75.1 from October's 70.6 from September's 71.1."

As for the national index, industries such as wood, furniture, appliances, fabricated metal and transportation equipment all slipped last month, hit by a housing market slump and bloated automobile inventories.

Norbert Ore, chair of ISM's survey committee, said the contraction in manufacturing after 40 or so months of growth matches past trends, and is a predictable response to the Federal Reserve raising interest rates.

"This isn't an indication of major decline in the manufacturing system," Ore said. He cast the downturn as a dip after a period in which manufacturing grew at a healthy rate.

The index was one of two worrisome economic reports Friday. The Commerce Department said construction activity in October plummeted by the largest amount since 2001, and home building fell for the seventh month in a row, the longest decline on record.

Both reports raised concerns that the economy may be in for a hard landing, and stocks and the dollar fell. The Dow Jones industrial average fell 27.80, or 0.23 percent, to 12,194.13. The Standard & Poor's 500 index dropped 3.92, or 0.28 percent, to 1,396.71, and the Nasdaq composite index fell 18.56, or 0.76 percent, to 2,413.21.

The drop does not bode well as Wall Street hopes to finish the final month of the year with double-digit growth. The Dow is up 13.78 percent so far this year, while the S&P 500 has gained 11.89 percent and the Nasdaq is up 9.43 percent.

The ISM and construction spending reports could be more pieces of an economic puzzle that would guide the Federal Reserve to either keep interest rates level, or cut short-term rates sooner than economists were expecting. The Fed raised rates for the 17th consecutive time in June, but have held them at 5.25 percent since then.

Fed policymakers will also be considering next week's service sector report from ISM. While the service sector has outperformed the manufacturing sector in recent months, and grew more quickly than analysts expected in October, Wall Street is expecting to see slower growth in the November reading.

Zoltan Pozsar, an economist at Moody's Economy.com, said the U.S. construction and auto industries may have pushed the ISM down, but at most, they make up a third of the industrial base.

"Orders and production will be soft going into next year," but will firm up once excess inventory is worked off, he predicted.

Pozsar also said the contraction will hit employment. He estimated 30,000 jobs were lost in housing-related industries in November and another 300,000 will be lost in the coming year, on top of 100,000 housing jobs lost since March.

"The job market seems a lot weaker than it was a year ago, which points to soft holiday shopping," Pozsar said, a trend he expects to intensify as the housing slump translates into people feeling less wealthy than when prices were high.