Manufacturing conditions in Midwest, including Minnesota, worst in three years

Minnesota and Midwest manufacturers digested more bad news this week as factories reported the worst monthly business conditions in three years.

The closely watched nine-state Mid-America Business Conditions Index, compiled by Creighton University, slumped to just 40.7 in November, down from the already dismal 41.9 index in ­October.

Minnesota, which had long defied the manufacturing downturn pinching other central U.S. states, saw its manufacturing index fall to 41.1 from October's 42.7 as factories here were battered by big declines in sales, production inventories and employment.

Any index below 50 signals economic retraction, so economists are quite concerned about such lackluster numbers.

"Our overall index has weakened significantly for states and industries heavily dependent on agriculture and energy, which are being hammered by a strong U.S. dollar," said Ernie Goss, director of Creighton's Institute for Economic Inquiry.

Creighton's state and regional indexes signal a sector in trouble and appear to corroborate problems highlighted in a series of weak corporate earnings reports. In six weeks, Minnesota-based behemoths such as 3M, Ecolab, Donaldson and Graco all reported sagging quarterly sales or profits and major problems with currency exchange rates that stem from the high U.S. dollar and the recession in Canada, which is Minnesota's largest trading partner.

"Domestically we are doing OK. But the biggest headwind for us is that currency exchange rates are reducing our sales by 5 percent year over year, said Charlotte Boyd, spokeswoman for Graco, a $1.3 billion maker of industrial pumps and sprayers headquartered in Minneapolis.

"It's more volatile than we have seen in the past," said Tom Paulson, Tennant's chief financial officer.

Even Polaris Industries, the Medina-based ATV and motorcycle maker that had a stellar third quarter, could not ignore currency pressures. It recently tamped down 2015 sales growth expectations because of negative foreign exchange rates.

CEO Scott Wine recently told analysts that economic conditions are toughening. "The combination of weakening currencies and softening economies [add] to the pressure we face from the sluggish oil and agriculture markets, all in the midst of the most competitive power sports landscape we have seen in nearly a decade."

Ernie Goss noted that in addition to the high U.S. dollar, U.S. manufacturers are wrestling with global weakness gripping parts of Europe, Brazil, Canada and China. Together they've had "a significant and negative impact on manufacturers and businesses linked to manufacturing" in the nine-state region that includes Minnesota, Iowa, Kansas, Nebraska, North and South Dakota, Missouri, Arkansas and Oklahoma.

Donaldson Co., which makes large filtration systems for factories, mines, planes and power companies, saw two of its biggest global customers, John Deere and Caterpillar, cut expectations for 2016 and announced layoffs.

The weakness is not ­confined to the Midwest.

The Institute for Supply Management reported Tuesday that U.S. manufacturing contracted for the first time in 36 months in November. The national index fell to 48.6 from 50.1 in October as U.S. factories reported setbacks in new orders, production, prices, supply deliveries and inventories.

"Ten out of 18 manufacturing industries reported contraction in November, with lower new orders, production and raw-material inventories accounting for the overall softness in November," said Bradley Holcomb, chairman of ISM's business survey ­committee.

Dan Meckstroth, chief economist at the Manufacturers Alliance for Productivity and Innovation, said the ISM report signals a downward shift. "The October report indicated that manufacturing activity [was] at a standstill and today's report says that activity is falling," he said. "Only 17 percent of the time in the last 25 years has the ISM index been at or less than 48.6, … so activity is abnormally weak."

One problem, he said, is that U.S. product exports are falling faster than imports. Meckstroth predicted that "foreign trade will be a major drag on manufacturing activity and the general economy this year and the next two years."