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ECONOMY

Pray for Rain

Drought Is Wilting U.S. Growth — for Now

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In this Aug. 16, 2012, file photo, dust is blown from behind a combine harvesting corn in a field near Coy, Ark.(AP Photo/Danny Johnston)

The weather forecast could have a big effect on America’s economic forecast next year. The more rain, the better.

A brutally persistent drought across the Midwest is exacting a toll on U.S. growth, the Commerce Department confirmed on Thursday. The department revised its estimate of second-quarter growth for this year down to 1.3 percent from 1.7 percent. Half the drop came from plunging farm inventories due to crop loss.

 

You don’t need to parse those stats to see drought effects across the economy now. You just need to shop for groceries. Prices are rising for grains and grain-fed livestock; last month’s producer-price index showed a whopping 23 percent jump in the price of eggs.

The longer those effects persist, the worse the outlook for the U.S. economy. When American consumers spend more for food, they spend less on other things, particularly the services that have largely accounted for what passes as a growth engine in the still-weak recovery.

Rising food prices could also hurt exports — cash-strapped consumers abroad won’t be able to afford as much of our stuff — but that effect could be mitigated by the Fed’s latest round of quantitative easing, which will likely serve to devalue the dollar against other currencies. 

 

History suggests that falling farm inventories might not be as big of a concern going forward. Barclays pointed out in a research note this month that the last drought-driven drop in farm inventories, in 2002, was followed by a much smaller drop the next quarter.

Nigel Gault, chief U.S. economist for IHS Global Insight, predicted in a research note Thursday that the drought will continue to hurt growth this year, “but that effect will unwind in 2013, assuming better weather next year.”

That’s a big assumption. And one every American needs to hope is correct.

 

 
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