Drought dragging down Midwest regional economy, study says

Kansas City StarAugust 1, 2012 

The relentless drought and deteriorating global economic conditions are combining to take a toll on businesses in a nine-state area that includes Kansas and Missouri, increasing concerns about another recession.

The July Mid-America Business Conditions Index plunged below growth neutral for the first time since 2009. The index hit 48.7, compared with 57.2 in June. Any score above 50 suggests growth while a score below 50 suggests decline.

The index has now declined for the third straight month, indicating a “rising likelihood” of a recession, said Ernie Goss, the Creighton University economist who oversees the monthly survey of supply managers.

Goss noted that the regional economy has benefitted in recent years from healthy exports and robust farm income. However, he said that “these two economic drivers are clearly moving in the negative direction.”

Recent gains in the dollar have made U.S. goods less competitive abroad, Goss said. “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.

Drought conditions are particularly hurting ethanol and food processors in the region, the economist said. Ethanol producers have either temporarily closed or cut back operations because of lower oil prices and a lack of corn or higher corn prices.

Businesses are also becoming more cautious in hiring, the survey said. “While government data on state job growth for July will be positive but tepid, I expect the numbers to move negative in the months ahead,” Goss said. “Very weak new orders and production for July will mean job lesses for firms in August.”

In Kansas, the business condition index slipped to 47.8 in July from June’s 51.7 reading. Businesses linked to food production and agriculture reported being hit hard by the drought, and Goss said he expects overall state economic growth to be “flat to negative” in the next three to six months.

Missouri’s business index fell to 50.2 in July, or slightly above growth neutral, from June’s 59.1. “One supply manager reported the shutdown of auto plants for July vacations pushed growth lower,” Goss said. “The purchaser expects to see production increases for August and September.”

However, the overall economic outlook for the state remains linked closely to the drought. “Food processors in the state, which account for more than one of six manufacturing jobs, will be negatively affected as higher input prices force cutbacks later in the year,” Goss said.

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

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