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Survey: Drought Drags Down Midwest Economy - Innovate Arkansas

Survey: Drought Drags Down Midwest Economy

By Associated Press, 8/1/2012 8:22:00 AM

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 survey said Arkansas' overall index dropped to 52.4 in July from 59.7 in June. Components of the index were new orders at 30.6, production or sales at 61.8, delivery lead time at 47.0, inventories at 52.0 and employment at 66.0.

"The drought will push growth in the state lower in the months ahead, especially for firms with close ties to the state's large poultry industry," Goss said. "Except for Nebraska, no other state in the region depends more heavily on food processing to support growth than Arkansas. As a result, higher farm commodity prices in the months ahead will be a significant economic headwind for the state economy, but growth should remain positive though weaker."

Food Processors Hurt

The drought already is negatively affecting ethanol and food processors in the survey region. Goss said many ethanol plants either have 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 from June's 56.7.

Hiring has slowed in the region, and Goss said he expects jobs 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.
• And delivery lead time declined to 55.9 from June's 56.2.

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