09.27.12

The Midwestern Drought Is Slowing Down Growth—and Won’t Stop

The economy in the second quarter grew slower than previously thought. Drought is the culprit.

Until Thursday, we thought the U.S. economy expanded at an anemic 1.7 percent annual rate in the second quarter of 2012. But the Commerce Department, upon reexamining the data, revised the growth rate to a mere 1.3 percent annual rate.

This was a 24 percent downward revision. Along with today’s depressing durable goods data, paints a grim picture for the U.S. economy.

A closer look at the revision data confirms that economic growth is, at best, sluggish. But it also reveals another important element of being stuck in slow growth—an economy that isn’t growing very quickly is very vulnerable to shocks, whether they are made by man or nature.

In this case, the horrific drought that afflicted the Corn Belt this summer and (is still ongoing) is responsible for a big chunk of the weaker then previously measured growth.

The Bureau of Economics Analysis (BEM), which calculates the GDP data, said in a statement accompanying the release that the downward revision reflected a larger than estimated decrease in inventories, mainly in farm inventories, which were “revised down due to this summer’s severe heat and drought.” Inventories, goods that businesses store to sell at a later date, are part of the “investment” portion of GDP, which are added up along with consumption, government spending, and exports (minus imports) to make up the GDP number.

Because of the drought, the worst in the United States since 1956, the amount of corn and soybeans that farmers could sell dove down more than the BEA originally estimated. The drop in inventories comes from $12 billion less of crops grown and $4 billion less in agricultural sales than previously estimated, which adds up to an inflation-adjusted drop in farm inventories of $5.7 billion.

The drought’s drag on growth won’t end with the second quarter—which ended in June.

Interestingly, the personal income of farmers barely contributed to the downward revision. Because of widespread crop insurance, which protects farmers from losses due to destroyed crops, some $6 billion of potential income loss to farmers was offset. Farmers’ drop in income still contributed to the downward revision, but only some $2.7 billion of it. Overall, according to Mark Zandi, the chief economist of Moody’s Analytics, the drought was responsible for “approximately 0.1 percentage point of the downward revision in real GDP growth.” This means that the drought is responsible for a quarter of the overall revision.

The drought’s drag on growth won’t end with the second quarter, which ended in June, while the drought is still ongoing. By the middle of August, according to the Department of Agriculture, 60 percent of American farms were experiencing drought, 43 percent were experiencing severe drought, and by Sept. 12, 2000 counties were designated by the USDA as disaster areas, mostly because of the drought. The third-quarter-GDP estimate, which comes out in October, will include the subsequent drought-induced losses. The BEA anticipates that the drought’s impacts will show up in the third and fourth quarters GDP data as well.