Drought Weighs on Region
July survey results at a glance:
- Leading economic indicator fell below growth neutral for the first time since 2009.
- New export orders drop to lowest level since August 2009.
- Business confidence takes biggest one-month plunge since 1994.
- Drought impacting ethanol and food processing plants.
Drought conditions across a nine-state region pushed the Mid-America monthly Business Conditions Index below growth neutral for the first time since 2009. The index, a leading economic indicator from a monthly survey of supply managers, declined for a third straight month indicating a rising likelihood of a recession.
Overall index: The index, which ranges between 0 and 100, fell to 48.7 from 57.2 in June. “As a result of deteriorating global and national economic conditions as well as drought conditions, the index took its biggest decline since the recession in November 2008. Over the past several years, the region has benefited from very healthy exports and robust farm income. These two economic drivers are clearly moving in the negative direction.
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,” said Ernie Goss, director of Creighton University’s Economic Forecasting Group and the Jack A. MacAllister Chair in Regional Economics.
This month supply managers were asked how the drought was impacting the cost of inputs purchased and the sales of output sold by their companies. Only 14 percent reported negative impacts on sales while 19 percent reported increasing costs due to the drought. Over the next six months, supply managers expect the cost of inputs that they purchase to rise by 2.1 percent.
“This is slightly higher than expected price increases from April of this year when we asked the same question,” said Goss.
The Creighton Economic Forecasting Group has conducted the monthly survey of supply managers in nine states since 1994 to produce leading economic indicators of the Mid-America economy. States included in the survey are Arkansas, Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, Oklahoma and South Dakota.
The forecasting group’s overall index, referred to as the Business Conditions Index, ranges between 0 and 100. An index greater than 50 indicates an expansionary economy over the course of the next three to six months. The Business Conditions Index is a mathematical average of indices for new orders, production or sales, employment, inventories and delivery lead time. This is the same methodology used by the National Institute for Supply Management, formerly the Purchasing Management Association, since 1931.
“Drought conditions are already negatively affecting ethanol and food processors in the region. In an earlier survey conducted in rural areas of the region, almost two-thirds of ethanol producers either temporarily closed or cut back operations due to lower oil prices and to a lack of corn and/or higher corn prices resulting from the drought,” said Goss.
Employment: The economic slowdown took its toll on the employment index. While the index remained above growth neutral for the seventh month in a row, it declined sharply to 51.1 from June’s much stronger 61.8. “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. Very weak new orders and production for July will mean job losses for firms in August,” said Goss.
Wholesale Prices: The prices-paid index, which tracks the cost of raw materials and supplies, was unchanged from June’s 51.1.“These low readings for our inflation gauge are consistent with weakening economic conditions. However, I do expect drought conditions in the region to push the index higher in the months ahead even as the economy continues to slow,” said Goss.
Confidence: Looking ahead six months, economic optimism, as captured by the July business confidence index, fell to its lowest level since the recession at 38.0, down from June’s 56.7. “This is the largest one month decline that we have recorded since we initiated the survey in 1994. European economic turmoil, the impending fiscal cliff, the national economic slowdown and the drought all combined to push the confidence index to recession levels,” said Goss.
Inventories: The July inventory index sank to 45.7 from 53.9 in June. “This is another signal of economic pessimism as supply managers cut the inventory levels for July in anticipation of slower production in the months ahead,” said Goss.
Trade: July’s export reading for the Mid-America region declined to 45.2, its lowest level since August 2009, and down from June’s weak 48.4. At the same time, July imports decreased to 46.5 from 51.5 in June. “Weaker global growth and the rising value of the dollar making U.S. goods less competitive abroad pushed the export reading lower. 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 for the nine-state region,” said Goss.
Other components: Other components of the July Business Conditions Index were new orders at 44.0, down from 57.3 in June; production or sales at 46.7, down from 56.7; and delivery lead time at 55.9, down from June’s 56.2.
Arkansas: The overall index, or leading economic indicator, for Arkansas slumped to 52.4 from June’s healthy 59.7. Components of the index from the monthly survey of supply managers for July 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. 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,” said Goss.
Iowa: Iowa’s July Business Conditions Index declined to 62.1 from June’s 68.0. The overall index for the state has remained above growth neutral for the last 31 months. Components of the index for July were new orders at 65.0, production or sales at 62.4, delivery lead time at 50.4, employment at 72.8, and inventories at 60.1. “I was very surprised to see the positive July readings for the state. I expect them to weaken significantly in the months ahead as the negative impacts from the drought winds through the economy. Food processing represents approximately one fourth of Iowa’s manufacturing sector and that will suffer from the higher farm commodity prices in the months ahead,” said Goss. One supply manager said, “The drought is having minimal impacts on the biological vaccines at this time. If it continues it will (negatively) impact our business.”
Kansas: The Kansas Business Conditions Index for July slipped to 47.8 from June’s 51.7. Components of the index from July’s survey of supply managers in the state were new orders at 51.8, production or sales at 43.5, delivery lead time at 47.0, employment at 42.9, and inventories at 54.0. “The USDA has declared almost 80 percent of the counties in Kansas as federal disaster areas as a result of the drought. Thus, not surprisingly, our July survey indicates that the drought is negatively affecting businesses with links to agriculture and food production in the state. I expect overall state growth to be flat to negative in the next three to six months,” said Goss.
Minnesota: The July Minnesota Business Conditions Index sank below growth neutral for the first time in almost three years. The index, based on a survey of supply managers in the state, declined to 45.6 from June’s much stronger 58.6. Components of the index from the July survey were new orders at 34.7, production or sales at 42.3, delivery lead time at 65.4, inventories at 35.7, and employment at 50.1. “The downturn in export orders weighed more heavily on the Minnesota economy for July than the drought. The global economic slowdown combined with the rising value of the dollar pulled the overall index below growth neutral for the month. I expect state growth to be flat to slightly negative in the next three to six months,” said Goss.
Missouri: The July Missouri Business Conditions Index was slightly above growth neutral for the month even though it plunged to a tepid 50.2 from June’s 59.1. Components of July’s Business Conditions 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. The purchaser expects to see production increases for August and September. On the other hand, the drought is having a very significant and negative impact on businesses that we survey with links to agriculture. 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,” said Goss.
Nebraska: For the first time since October 2010 the Business Conditions Index for Nebraska declined below growth neutral 50.0. The index from a survey of supply manager in the state slumped to 48.3 from 54.5 in June. Components of the index were new orders at 46.0, production or sales at 47.9, delivery lead time at 51.9, inventories at 48.0, and employment at 47.9. As stated by one supply manager, “I believe the drought will have a significant impact on Nebraska and surrounding states. I pray that 2013 returns to normal rainfall.” As a share of the state economy, no other state in the region depends more heavily on livestock production and food processing. “Both of these will be negatively impacted by drought. We are already detecting significant and negative impacts in our monthly surveys from the drought. I expect those negative impacts to grow in the months ahead with consequent pullbacks in the Nebraska economy, at least in the short run,” said Goss.
North Dakota: The leading economic indicator for North Dakota declined to a still healthy reading for July. The Business Conditions Index dipped to 56.5 from 63.0 in June. Components of the overall index for July were new orders at 58.7, production or sales at 57.3, delivery lead time at 56.8, employment at 59.3, and inventories at 50.3. “While the impacts from the drought are not as severe in North Dakota, they are nonetheless affecting the state economy. In addition to businesses tied to agriculture and food production, shortages of water are negatively affecting energy production in the state. While I do expect positive growth for the state in the months ahead, it will clearly be slower,” said Goss.
Oklahoma: The Business Conditions Index for Oklahoma slumped to 52.7 from 56.8 in June. Components of the leading economic indicator for the July survey of supply managers in the state were new orders at 56.6, production or sales at 51.5, delivery lead time at 53.2, inventories at 50.1, and employment at 52.3. “With drought conditions in all of the state’s 77 counties, it was not surprising to measure a decline in Oklahoma’s leading economic indicator. With feed costs rising, livestock producers in the state are selling off their herds. Thus, businesses linked to agriculture, especially livestock where there is not crop insurance, will experience slower to no growth in the months ahead. I do expect Oklahoma’s growth to remain positive but much slower in the months ahead,” said Goss.
South Dakota: The leading economic indicator for South Dakota declined below growth neutral for July. The Business Conditions Index from a survey of supply managers in the state declined to 46.0 from June’s 52.1 and May’s much stronger 62.4. Components of the index for July were new orders at 41.6, production or sales at 44.4, delivery lead time at 49.7, inventories at 48.1, and employment at 46.3. “The drought is having a substantial and negative impact on the state’s economy. Based on our survey, the impact will pull growth into negative territory in the months ahead. While crop insurance will soften the impacts on crop farming, livestock producers and businesses tied to this important state sector will suffer in the months ahead. For example, food processing accounts for almost one out of every six manufacturing jobs in the state. This industry will experience negative impacts from higher input costs resulting from the drought,” said Goss.
Survey results for August will be released Sept. 4.
Follow Goss on twitter at http://twitter.com/erniegoss
For historical data and forecasts visit our website at: