Drought and dollar cause key business index to sink

The drought and a soaring U.S. dollar soured business conditions across much of middle America, according to a closely watched report issued Wednesday by Creighton University.

Supply managers surveyed across nine states reported that business conditions fell below an index of 50 for the first time since 2009. Any index above 50 signals growth. But any index below 50 signals economic contraction.

The Mid-America index fell to 48.7 percent in July from 57.2 in June.

Food processing plants and ethanol producers were especially affected by drought. In addition, new export orders across most industries fell to their lowest level since August 2009, while business confidence saw the biggest one-month drop since 1994.

The Creighton University report measures economic conditions in Minnesota, Iowa, Missouri, Oklahoma, Arkansas, Kansas, Nebraska and North and South Dakota.

In Minnesota, the Central MN Ethanol plant in Little Falls stopped production two weeks ago because of poor margins on ethanol and laid off 25 workers, Dana Persson, CEO and general manager, said Wednesday.

"It is due to the current crush margins -- they are particularly weak," Persson said, referring to the industry measure of the cost of producing ethanol. "Corn is in short supply."

Last week, Green Plains Renewable Energy, the nation's fourth-largest ethanol producer, whose nine plants include one in Fergus Falls, Minn., reported a $7.6 million loss for the quarter ending June 30. It was the second quarter in a row that the Omaha-based company lost money.

The nation's ethanol production plunged nearly 13 percent in the past five weeks to a 2 1/2-year low, and many ethanol operations are running at a loss, according to CME Group, which operates the Chicago Board of Trade.

Minnesota's index fell to 45.6 in July from 58.6 in June due to a drop in new orders and exports that were hurt, in part, by the rising U.S. dollar.

"The downturn in export orders weighed more heavily on the Minnesota economy for July than the drought," said Ernie Goss, report author and director of Creighton University's Economic Forecasting Group. "The global 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."

National index

In a separate report Tuesday, the Institute for Supply Management (ISM) found that the overall economy grew in July, but that the manufacturing economy contracted for the second time since July 2009.

Economists said the report was not surprising, given that the U.S. government just announced that the gross domestic product grew only 1.5 percent during the second quarter.

ISM manufacturers reported that new orders and inventories contracted even as production, raw-material pricing and employment grew and supply deliveries were faster.

The overall ISM index was 49.8. While the index moved up 0.1 percentage point from June, it marked the second month in a row the index failed to hit the 50 neutral growth mark. June and July's results followed 34 months of growth, said ISM Chairman Bradley Holcomb.

"A growing number of comments from the panel this month reflect a slowdown in their businesses and general concern over increasing economic uncertainty," Holcomb said.

On the bright side, supply managers saw growth for factories making machinery, autos, plastics and primary metals.