While the economic index for the mountain states remains higher than the national average, leading economic indicators are slipping, according to the Goss Institute for Economic Research.

The overall business conditions index slipped to 56.1. The index is a measure of indices for new orders, production, employment, inventories and delivery lead time.

The big problem this summer: drought.

“Almost 80 percent of the 116 counties in the three-state region have been declared by the USDA as drought disaster areas,” said Ernie Goss, director of the institute. “However, at this point in time, weather conditions have yet to adversely affect companies in our survey, although the readings for Colorado were considerably lower than for Utah and Wyoming.”

About 14 percent of companies reported that drought conditions had increased the costs of supplies, while none reported problems with sales.

“I expect this to change in the months ahead,” Goss said, “pulling the index lower. A stronger dollar, making U.S. goods less competitive abroad, will also dampen growth.”

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OIN Colorado, the state’s leading economic indicator plummeted in July. It slumped below growth neutral to 49.6, Goss said.

“With 62 of the 64 counties in the state suffering through significant to severe drought conditions, it was not surprising to record an overall index below growth neutral,” he said. “While food production, both on the farm and in the factory, are not a substantial part of the state’s economy, the backward linkages to other businesses in the state are important. As a result, I expect the drought to continue to weigh on the state economy in the months ahead.”

Other factors:

– Employment in the mountain states outperformed the rest of the United States, but could weaken in the next quarter.

– Slower economic growth, European economic turmoil and a stronger dollar are contributing to moderate inflationary pressures. Wholesale prices are expected to rise.

– Business confidence is lower, again due to European debt issues, as well as the fiscal cliff expected in January.

– Supply managers added to inventories of raw materials for the month, for the 32nd straight month. Health growth signals that supply managers expect product expansions.

– Weaker global trade pushed the export reading lower.