QE3 and the Drought

One very good reason for the Fed to hold off on QE3 is that QE2 seemed to have the unintended consequence of boosting food and fuel prices, which depressed consumers’ purchasing power and spending. The terrible drought in the US is pushing grain prices up to record highs, while gasoline prices are rebounding as tensions mount between Israel and Iran. In other words, real incomes are about to get hit again. There is nothing the Fed can do about it other than to make it worse.

The drought in the US is quickly turning into a major disaster. I may have to lower my forecast for GDP for the second half of the year if it doesn’t abate soon. Yesterday, the US Agriculture Department added 218 counties in a dozen states as disaster areas. That brings this year's total to 1,584 in 32 states, more than 90% of them because of the drought. More than half of US counties now are classified by the federal government as natural disaster areas mostly because of the drought.

The 7/31 WSJ reported that farm incomes won’t be battered by the drought “as widespread use of crop insurance and record corn and soybean prices cushion the blow to growers.” That may be so, but the drought is likely to depress spending on farm equipment, including light trucks.

The economies of the Midwest and the South have been particularly strong thanks to their booming agriculture and manufacturing industries. Now even manufacturing is showing signs of slowing, as evidenced by the latest survey of purchasing managers.

Today's Morning Briefing: Talking About Doing More. (1) FOMC will closely monitor. (2) Dueling mandates. (3) Half-lives of new monetary policies getting shorter. (4) Time to assess dim WITs. (5) Ronald Reagan vs. Mario Draghi. (6) ADP is underappreciated. (7) Birth/Death Adjustment doesn’t track ADP small business employment. (8) Will auto sales wilt with corn crop? (More for subscribers.)