MONEY

Is Iowa heading for a recession?

Kevin Hardy, and Donnelle Eller
DesMoines
Bridgestone/Firestone is one large employer in Iowa at risk when the ag sector starts to slow down. The Des Moines company makes ag inputs, like this wide tire.

A record number of Iowans are working, state revenue is growing and plummeting gas prices are putting more money in consumers' pockets — and yet, cracks are beginning to show in Iowa's economy.

Iowa's economy, weighted down by a sagging agricultural market, has sent signs for eight months that a contraction could be coming, a recent state report warns. Coupled with a shaky stock market and a decelerating global economy, some economists caution that Iowa's slowing growth could turn into a full-blown downturn in the months ahead.

Iowa is nearing a "turning point" where the economy could dip into a recession, said Creighton University economist Ernie Goss, who studies the economies of Midwestern states.

"We’re not there now," he said, "but it wouldn’t take much to push us there.”

So far, however, Goss doesn't see any looming crisis like the subprime mortgage crisis that preceded the last recession.

MORE: Iowa's demand for mortgages 'muddling along'

MORE: Farm income to fall in 2016 amid low grain prices

"We don’t really have a real black swan like we had at that point in time," he said "... But that’s how you define a black swan — you don’t see it."

Softness in Iowa's farm sector — and its drag on manufacturing — is the biggest threat to Iowa's overall economy so far. One of Goss' reports, for example, shows Iowa manufacturing contracting for five months.

On Tuesday, the U.S. Department of Agriculture released a new forecast predicting that the nation's farm income would fall to $54.8 billion in 2016, its lowest level since 2002.

"Ag has been contracting now for the last a couple of years, especially on the crop side, and the broader Iowa economy is feeling the pinch," said Chad Hart, an Iowa State University economist.

So far, though, the farm downturn "isn't significant enough yet" to pull down the state's broader economy, Hart said.

Iowa's economy is starting to show a few cracks that stem from the lagging agricultural sector.

Offsetting the ag downturn

He and other economists believe strength in financial services, construction and other industries will offset that weakness.

David Swenson, another ISU economist, said the expanding U.S. economy will help drive demand for Iowa goods and services.

"That demand has nothing to do with the performance of the Iowa ag economy," said Swenson, who expects the state's economy to enjoy "reasonable growth" this year.

Moreover, he said, some Iowa sectors are outperforming the nation, such as construction, which has more jobs than before the housing crash.

"There are still a whale of a lot of construction projects, housing developments and commercial building going on," he said.

Despite strength in other industries, Hart and other economists warn that the pain created by agriculture's slowdown is far from over.

Farming is only about halfway through a downturn that Hart predicted could last six years or longer. And it could worsen if U.S. farmers see another year of record production.

Large supplies are outstripping demand, pushing corn and soybean prices down 50 percent to 60 percent from record highs in 2012.

"Another bumper crop like we’ve had for over three years, and prices will continue to fall and continue to stress the Iowa economy," he said.

Revising revenue estimates

Already, the state has inched back its estimated revenue growth for this fiscal year, revising it to 3.3 percent from last year's projection of 3.4 percent.

And Mike Lipsman, an economist with Strategic Economics Group in West Des Moines, expects that state officials may scale down their revenue estimates even more as farmers begin filing their income taxes next month.

Lipsman doesn't expect an economic meltdown approaching the Great Recession. Nor does anyone see a return of the 1980s farm crisis, one of the worst economic downturns in Iowa's history, when the state's unemployment rate hit 9.1 percent.

"I wouldn't say recession," Lipsman said. "But for a lot of people it's going to feel that way. It’s just slow growth."

And Iowa will definitely feel it, he said, given the state's heavy involvement in farming.

"When the ag sector goes bad, Iowa gets hit probably more than the rest of the country, because not only are we leaders in corn, soybeans, hogs and poultry," he said, "but also we’re big producers of ag inputs, which are purchased by much more than Iowa farmers."

Manufacturing layoffs

Manufacturers tied to agriculture, in turn, have been cutting employees, including Deere & Co., Kinze Manufacturing and Bridgestone/Firestone tires.

Deere alone has cut nearly 1,400 workers in Iowa over about a year as the U.S. farm income has plummeted.

And Iowa farm income has dropped nearly 40 percent to about $5.1 billion in 2014, compared with 2013, the most recent U.S. Department of Agriculture data available.

RELATED: Deere lays off 220 employees, citing sales dropBridgestone cuts 69 workers at Des Moines tire plant

Steve Vonk, president of United Steelworkers Local 310L, said Bridgestone/Firestone has been cutting hours since 2012. Last year, the company asked for 70 workers to volunteer for six-month layoffs. It’s making the same request again this year.

“The farm economy is cyclical, but it feels like this is taking longer to dig out of the hole than it has in the past,” said Vonk, whose union represents 1,200 workers at the north Des Moines plant.

Though leaders of Iowa’s biggest companies maintain an overall positive outlook, about one in five members of the Iowa Business Council predicted declines in employment levels for the first half of 2016.

DuPont merger's huge footprint

More jobs will likely be cut as chemical and ag giants DuPont and Dow pursue a merger. The huge conglomerates announced in December they plan to merge and then spin off three companies, including a new $18 billion agricultural company.

Even as the announcement was made, DuPont, the Delaware-based parent of DuPont Pioneer, said it would cut $700 million, including 5,000 to 6,000 jobs — or 10 percent of its global workforce.

DuPont Pioneer, the Johnston-based seed company, is beginning to see layoffs, although officials have declined to say how many. State records show that about 30 jobs have been cut so far this year, on top of about 50 last year.

The company employs about 2,840 workers in Iowa, mostly in the Des Moines metro area.

RELATED: DuPont reports 4Q loss, steps up cost cuts ahead of Dow deal | Dow, DuPont execs visit Iowa, meet with Branstad

DuPont-Dow leaders said they expect to find at least $3 billion in synergies when combining the companies. That means cutting overlapping jobs, operations and facilities.

Gov. Terry Branstad, state economic development leader Debi Durham and others are heavily lobbying DuPont-Dow executives to keep existing operations and jobs in Iowa as well as land the new ag headquarters.

Small towns bear brunt

Michael Swanson, a Wells Fargo economist, said cities such as Des Moines, Cedar Rapids, Ames and Iowa City may escape the full brunt of ag's downturn. But small rural towns and cities may be unable to avoid it.

Evidence of that is already appearing. For example, in Waterloo-Cedar Falls, where hundreds of Deere manufacturing jobs have been slashed, the unemployment rate sat at 4.2 percent in December, while the Des Moines metro area's jobless rate was 3.2 percent, slightly less than the state's 3.4 percent at year-end.

Amy Rehder Harris, chief economist at the Iowa Department of Revenue, said the state anticipates a slowdown in job growth but hasn’t seen it yet.

"Is it something to be worried about? We’re certainly thinking about it," she said.