Survey: Drought dragging down Midwest economy

Wednesday, August 1, 2012 | 2:47 p.m. CDT

OMAHA, Neb. — The ongoing drought, combined with global economic turmoil, is hurting business in nine Midwest and Plains states and boosting worries about the possibility of another recession, according to a monthly report released Wednesday.

The region's overall economic index for July plunged below growth neutral for the first time since 2008. The index hit 48.7, compared with 57.2 in June.

The survey of business leaders and supply managers uses a collection of indexes ranging from zero to 100. Any score above 50 suggests growth, while a score below 50 suggests decline for that factor.

Concerns about Europe's debt woes and the slowing U.S. economy already were weighing on the region's economy before the drought hit this summer.

Creighton University economist Ernie Goss, who oversees the survey, said the drought will hurt farm income while the strengthening dollar hurts exports. So two of the most important positive factors in the region's economy are being undermined.

"Recent gains in the dollar have made U.S. goods less competitively priced abroad. Combine that with drought conditions,  and we will see farm income take a hit, and that will spill over into other industries in the region," Goss said.

The survey covers Arkansas, Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, Oklahoma and South Dakota.

The drought is already negatively affecting ethanol and food processors in the region. Goss said many ethanol plants have either closed temporarily or reduced operations because of the higher corn prices that come with the drought.

The business leaders surveyed were quite pessimistic about the economy for the next six months. The confidence index plummeted to 38 in July, way down from June's 56.7.

Hiring has slowed in the region, and Goss said he expects job numbers to decline in the months ahead. The survey's employment index declined to 51.1 in July from June's relatively strong 61.8.

The prices-paid index, which tracks the cost of raw materials, remained unchanged in July at 51.1.

The July inventory index dropped to 45.7 from June's 53.9. Goss said that suggests businesses were reducing inventory because they anticipate slower production in the months ahead.

The export reading fell to 45.2 in July, which is its lowest level since August 2009. That's down from June's already weak 48.4 export reading. And the import index declined to 46.5 in July from June's 51.5.

"Weaker global growth and the rising value of the dollar making U.S. goods less competitive abroad pushed the export reading lower," Goss said. "At the same time, slower regional growth restrained the demand for imported supplies and materials. I expect trade numbers to weaken even more in the months ahead."

The other components of July's overall index were:

  • New orders fell to 44 from June's 57.3.
  • Production or sales dropped to 46.7 in July from 56.7 the month before.
  • Delivery lead time declined to 55.9 from June's 56.2.
The report, the Survey on Economic Conditions for Business in the Mid-American and Mountain States, is released by Creighton University.
Missouri at a glance

The state's overall index plunged to 50.2 in July from 59.1 in June. Components of index were new orders at 45.4, production or sales at 47.0, delivery lead time at 60.6, inventories at 45.4 and employment at 52.9. "One supply manager reported the shutdown of auto plants for July vacations pushed growth lower," said Creighton University economics professor Ernie Goss.

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