GDP: Drought knocked 0.2 points off growth in second quarter

September 27, 2012

The U.S. economy grew even more slowly than originally thought in the second quarter of 2012, according to new data from the Commerce Department. One culprit? The severe heat and drought that has dented crop production in the Midwest this summer.


Squeezing the economy (AP)

The overall economy grew at a disappointing 1.3 percent annual pace in the April through June period, down from the government's previous estimate of 1.7 percent growth. Roughly half of that decline came from a sharp fall in farm inventories. Crop production declined $12 billion over the quarter, data showed, "due to this summer's severe heat and drought."

Farms weren't the only soft spot in the economy, which is struggling on multiple fronts. Consumer spending grew more sluggishly than expected. Business investment has been modest. Spending on residential housing also slowed. Yet the historic dry season appeared to play the largest role in the government's downward revision, as farm inventories — the crops and grain and cattle that are stored on farms — dropped by $5.3 billion in the quarter.

Some analysts saw this as good news, arguing that the drought-induced slowdown will only prove temporary. "Don't panic," cautioned a research note from Capital Economics. The weak patch, the firm argued, "will eventually be reversed when the drought abates."

Eventually that may prove true. Yet the drought is expecting to keep pinching growth throughout the rest of the year. The research firm Macroeconomic Advisers now expects the U.S. economy to grow at a mere 1.5 percent annual rate in the third quarter of 2012, down from its earlier forecast of 2 percent. The projected deceleration is due to a number of factors, but a drop in farm inventories is a big one.

“While the farm sector directly accounts for only about 1% of the U.S. economy," the company said, "the hit to farm output is likely to be large enough to have a noticeable impact on U.S. GDP. A rise in the price of food late this year and into next year will lower real income and wealth enough to shave an additional one-tenth from GDP growth in the fourth quarter of this year and the first quarter of next year.”

It's worth noting that the drought continues to persist across much of the country. On Thursday, the U.S. Drought Monitor showed that 65.5 percent of the continental United States was suffering some form of drought. While that's down from the summer, when nearly 80 percent of the country faced moderate or exceptional drought, it's still a severe dry spell coming just as the corn harvest is getting underway.

Further reading:

— Neil Irwin has more on another trouble spot for the U.S. economy, a sharp fall in business investment.

— What we know about climate change and drought.

— Amid a devastating drought, does it still make sense to use corn for fuel?

— Farmers turn to engineered corn to adapt to drought. But will it be enough?

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Sarah Kliff · September 27, 2012