A severe drought and rising raw material costs continued to batter the economy throughout most of the Midwest in August, according to a closely watched report released Tuesday.

The Business Conditions Index from Creighton University said the Mid-America economic region contracted for the second consecutive month, the first time since July 2009. The index stood at 49.7 in August, up from July's 48.7, but below the critical mark of 50.

Figures below 50 indicate contraction. Indices above 50 signal expansion.

"While current farm income has yet to be negatively and significantly reduced, businesses that sell to the agriculture sector are experiencing pullbacks in economic activity," said Ernie Goss, director of Creighton University's Economic Forecasting Group and the author of the monthly report.

Growth was stalled across most of the nine-state region, which includes Minnesota, Iowa, South Dakota, North Dakota, Nebraska, Missouri, Oklahoma, Kansas and Arkansas.

In the Midwest, supply managers surveyed by Creighton University largely blamed drought conditions, increasing raw material costs, the uncertain U.S. economy and slowing global growth for the lackluster showing.

In Minnesota, the business conditions index rose to 49.7 from 45.6 in July. Supply managers reported slowing orders, production and inventory but improved delivery lead times and a slight uptick in employment.

"Minnesota's economic and job growth were strong for the first half of 2012. Despite solid gains, the state is still down approximately 60,000 jobs, or 2.2 percent, from pre-recession levels," Goss said. "Losses in [food and other] non-durable goods manufacturing is weighing on the state economy with little job growth expected for the Minnesota economy in the next three to six months."

Results largely matched those reported Tuesday by the Institute for Supply Management (ISM). That national index was 49.6 percent, which indicated contraction in the manufacturing sector for a third consecutive month and was the lowest since July 2009.

The ISM report said only eight of 18 manufacturing sectors grew last month. They included printing; primary metals; food, beverage and tobacco; petroleum and coal; apparel and leather goods; paper; chemicals, and miscellaneous manufacturing.

Little joy in reports

Josh Bushard, manufacturing leader for the Grant Thorton accounting office in Minneapolis, said neither the national or Midwest report inspires confidence.

Manufacturers' "order numbers and backlog numbers in both reports are not great. And that is a concern. It's the thing that concerns me the most," Bushard said. "That is contributing to pessimism about the future. [Clients] are cautious and that will not bode well on the hiring side."

The irony is that the pessimism appears somewhat overblown, he said. The 50 food, equipment, machinery and consumer product manufacturers that Bushard services are in Minnesota and the Dakotas.

So far, they have boasted very steady revenues and no layoffs. But back orders are slowing and raw material pricing, with the exception of steel, appear to be going up, he said.

"They are doing fine financially. But some of the executives I talk to are almost expecting that there will be a small recession in 2013."

Dee DePass • 612-673-7725