Minnesota and Midwest factory conditions contract in August

Manufacturing conditions across Minnesota and the rest of the country contracted in August amid stubbornly weak oil and agriculture sectors, according to two closely watched economic reports released Thursday.

The nine-state Creighton University Mid-America Business Conditions Index, which includes Minnesota, fell below the critical "growth neutral" threshold of 50 for a second straight month as factory leaders continued to battle downturns in agriculture and energy and lackluster trade overseas. The index was a weak 47.8 in August, not much improved from the sobering 47.6 in July.

The index for Minnesota, as well as a national report released Thursday, also fell below 50. The Institute for Supply Management's August factory index fell to 49.4 percent from 52.6 percent in July as U.S. factory production, new orders, inventories and employment all decreased during the month.

"The data is much weaker than expected as the consensus [among economists] was looking for the index to tick down to 52," said Thomas Simons, Jefferies LLC's senior money market economist. "The decline this month is discouraging."

For months, Minnesota factories had been growing and performing significantly better than surrounding states. August changed that. Yet Minnesota's business conditions index, as measured by Creighton, fell to 49.4 in August from 51.2 in July as new orders, sales and employment contracted across the state, even while deliveries and inventories grew.

"Business losses for [Minnesota's] metal manufacturers and machinery producers more than offset gains for computer and electronic product manufacturers and food processors in the state," said Ernie Goss, director of Creighton's Economic Forecasting Group that produces the Mid-America report. Minnesota's factory employment has been weak for months, growing just 0.2 percent during the past 12 months. That compares to a 1.5 percent employment gain for all sectors.

"Weakness among manufacturers linked to agriculture and energy continue to weigh on regional economic conditions," said Goss, whose index also measures activity in Iowa, Kansas, Nebraska, South and North Dakota, Missouri, Arkansas and Oklahoma. "Due to the heavy dependence of the region on these two sectors, I will expect to see the regional economy to continue to underperform the national economy."

In Minnesota, businesses not tied to oil, mining and crop equipment reported a good month, including Tom Schabel, CEO of aluminum extrusion firm Alexandria Industries. This year, orders from auto and gun makers are "extremely robust," Schabel said.

"This year, we've had more suppliers and customers ask if we are seeing any signs of a slowdown," Schabel said. "No one says they are slowing, but that question gives you [the sense] that confidence is not as robust as it was maybe six or nine months ago. And I don't like hearing that the [ISM index] has gone down because that's pretty darn accurate."

Cheri Beranek, CEO of the Brooklyn Park-based fiber optic and telecommunications firm Clearfield, said her revenue should grow 25 percent during the fiscal fourth quarter that ends Sept. 30. That's in part because Clearfield doesn't cater to hard-hit industries such as mining, ag and oil and because few of her telecommunications customers have consumers willing to go without cellphone and high-speed internet service.

That's prompted growth — and a problem, she said. Clearfield needs to add 24 new workers. But finding fresh factory workers is "challenging" because unemployment is low and there is competition for workers from other sectors. Schabel in Alexandria has the same problem.

In reporting recent quarterly earnings, many Minnesota-based companies such as Polaris, Arctic Cat and Pentair reported seeing tougher environments in farm and dairy country and in recession-weary Canada, the largest trading partner of all nine states in the Creighton survey. Pentair recently announced it would sell its volatile and oil-dependent valves and controls division to Emerson.

Forecast adjustments have proliferated nationwide as producers adjust to slower growth. The supply institute report found that six of 18 U.S. manufacturing industries grew during August: printing; nonmetallic mineral products; computer/consumer electronic products; food, beverage & tobacco; chemical products; and miscellaneous manufactured goods. Anecdotally, surveyed supply managers reported that businesses related to construction and medical goods were also going well.

Several supply managers surveyed by ISM also balked at the struggle to find qualified production workers, said Bradley Holcomb, ISM chairman of the manufacturing business survey committee. They also complained about flat sales, poor business conditions and an oil industry that was just beginning to bottom out.

Dee DePass • 612-673-7725