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How The Drought Is Affecting The Economy

Mon, 10/29/2012 - 9:42am
MARCY GORDON and PAUL WISEMAN,AP Business Writers

WASHINGTON (AP) — The worst drought in decades didn't just shrivel corn and soybeans. It shrank economic growth too.

The government said Friday that the U.S. economy grew at a modest 2 percent annual rate from July through September. And the crop-killing drought reduced growth by 0.4 percentage points.

That means normal weather would have lifted economic growth to 2.4 percent for the quarter, the Commerce Department said.

Below are questions and answers about the drought and its effect on gross domestic product. GDP is the broadest measure of the economy.

Q: How severe was the drought?

A: The dry spell that hit the Midwest and Great Plains last summer was the worst since the 1950s. It covered 80 percent of U.S. farmland. The drought hit hardest in July, a critical time for corn and other crops. Corn production is expected to drop more than 13 percent in the 2012-2013 growing season. Soybean production will likely fall 8 percent. Cattle, sheep and pig farmers are getting hit, too: The cost of feed is rising, and pastures have withered in the heat.

Q: How did the drought reduce economic growth?

A: Mainly by reducing crop supplies. Smaller supplies cut growth by 0.17 percent point from April to June and by 0.42 percentage point from July through September. Jeet Dutta, a senior economist at Moody's Analytics, says he thinks the worst is over. He expects the drought's impact on growth to diminish to 0.1 percentage point in the final three months of 2012.

Q: Does the economic damage go beyond the farm?

A: Yes, because GDP figures don't capture, for example, higher food prices that can follow a drought. And farmers hit by a drought typically cut back on purchases of farm equipment, vehicles and other goods. That can hurt merchants in farm country and damage that part of the economy. Ernie Goss, an economics professor at Creighton University in Omaha, says Midwest merchants are expecting a weak holiday season in part because farmers have curtailed their spending. And the drought led to lower water levels in the Mississippi River that stranded barges, causing costly shipping delays.

Q: How does the economic damage from droughts compare with the damage from other natural disasters?

A: Hurricanes and earthquakes can reduce economic growth by disrupting production and consumer spending. But once the earth has stopped shaking and the winds have died down, communities can rebuild, boosted by insurance payouts and federal aid. Reconstruction can help the overall economy. By contrast, crops killed by drought can't be recovered. "It's a one-shot-a-year production practice for corn and soybeans," said Todd Davis, an economist at the American Farm Bureau Federation.

Q: Have farmers' incomes suffered?

A: Despite the drought, the U.S. Agriculture Department expects farm incomes to hit $122 billion this year, highest since 1973 when adjusted for inflation. They've benefited from higher prices for their crops and livestock. And government-subsidized crop insurance helps cushion the damage. Congress has been promoting crop insurance since the 1990s, notes economist Mekael Teshome of the PNC Financial Services Group.

Q: What is the effect on American consumers?

A: Prices for corn and soybeans in commodity markets have probably just about peaked, PNC says. But it will take three to six months for higher food prices to work their way through the food chain, says Dutta of Moody's. The Agriculture Department expects food prices to rise between 3 percent and 4 percent next year. That would be up from an average of 2.5 percent to 3 percent over the past 20 years.

___

AP Business Writer Jim Suhr in St. Louis contributed to this report.

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