Iowa’s economy is facing multiple challenges, from the government shutdown and an overinflated stock market to trade volatility, according to Peter Orazem, interim chair and professor in the Iowa State University economics department who focuses on labor and public economics. Orazem was the guest on the second episode of the Business Record’s Iowa Economy Podcast. 

Orazem sat down with host Chris Conetzkey at the start of November to discuss what issues are shaping Iowa’s economy. 

“It’s hard not to start off with the government shutdown. We’ve just finished our first month, we’re going into our second month, and the real economic implications of that are about to hit,” Orazem said. “Federal government employees are about 2% of total employment [nationally] and not only that, but they’re responsible for a lot of the infrastructure that we rely on. We’re already hearing about issues in terms of air traffic control, but you’re going to have everything from not being able to get food safety regulators on board for meatpacking to any number of things that are going to disrupt the smooth functioning of the private sector in the economy.”

The federal deficit and overspending is another challenge, he said. 

“What’s odd is [the shutdown is] sitting on top of the fact that we’re running about a $1.8 trillion deficit, which is about 6% of GDP, which is not sustainable,” Orazem said. “We have this unusual combination of a shut down government on top of massive federal spending that is, I think, a long-term threat to the viability of our private sector.”

Price earnings ratios matter too, Orazem said, and the price earnings ratios of the S&P 500 are right back to where they were before the dot-com crash during the early 2000s. 

“That ought to make you scratch your head a little bit as to where we are headed in terms of what looks to be a very overinflated stock market,” he said.

The volatile swings in tariffs, from 2.4% a year ago to 17% now, are prohibitively increasing the cost of importing goods, he added. 

“A lot of the issues related to tariffs, I think, have yet to be realized,” Orazem said. 

Shutdown effects snapshot

Orazem said luckily in Iowa, the government shutdown has not affected the Department of Transportation. 

“That’s an issue in Iowa because we rely on surface transportation for a good chunk of our transportation and warehousing business, and because they are paid for by gasoline taxes rather than other sources of revenue, they’re actually still in business, even as other areas of the government have been shut down,” he said. 

There are government employees who are still working because their jobs are important, but that won’t last forever, Orazem said. 

“There are things that you don’t think about. For example, here on campus, we have federal labs, and some of that has been disabled. We have research that is being disrupted. We have the National Animal Disease [Center] here in Ames and some of those functions have also been disabled. They have people who are now, for example, studying avian flu who are not being paid. How long is that going to continue? You’re relying on a lot of people who have to do their job because they’re considered mission critical that the government is not paying, and at some point, I think the wheels are going to come off that enterprise.”

U.S. Department of Agriculture data is not being updated due to the shutdown, putting independent farmers at a potential disadvantage, Orazem said. 

“You can view the USDA, for example, as the democratization of information. If you’re Cargill, you have a pretty good idea of what the harvest is going to be and what prices ought to be. But if you’re a farmer in the middle of Iowa, you don’t have access to that same research support, and you rely on the USDA to tell you, ‘OK, here’s where the harvest is coming in. Here is where we’re seeing opportunities, perhaps, for trying to sell some of your product forward, or using futures and options to diversify risk.’ All of that is discontinued, and so the information that we have going into the harvest season, we’re just flying blind. The last information we have is from a couple months ago.”

Tariffs on Iowa’s trade partners are affecting input prices for manufacturers, he said.  

“If you’re John Deere and the cost of aluminum and steel has gone up precipitously in the last eight months, your input prices are rising at the same time that the demand for your product is falling,” Orazem said. “A lot of our manufacturing in Iowa is not geared toward selling just in Iowa. It’s geared toward selling nationally and internationally. It’s that latter part that has had consequences, then, for the bottom line at John Deere, which has had consequences for employment in manufacturing, not just at John Deere, but at other agricultural implement manufacturers here in the state.”

‘Ask an Economist’

The Iowa Economy Podcast features a segment called “Ask an Economist,” where the guest economist answers a submitted question from a Business Record reader. In this episode, Oakridge Neighborhood President and CEO Deidre DeJear asked, “Iowa is set to experience a significant drop in revenue in 2025 and 2026. How do you think this reduction in revenue might impact state services and Iowa’s long-term fiscal stability?”

Orazem responded, “The state has been engaged with a series of annual cuts to income tax rates, with the idea of flattening the income tax rate in Iowa and lowering the average rate. There’s also an effort in place to try to reduce property tax rates, which are relatively high in Iowa compared to most states, including many of our neighboring states. That obviously is going to have some impact on revenues. The federal One Big Beautiful Bill Act also had implications for income tax liabilities at the federal level. Because Iowa has rolling conformity with the federal income tax rate, that also lowers tax liability here in the state. Immediately, the state Revenue [Estimating Conference], which had been projecting a 4.8% shortfall in tax revenues, it’s now at 9% or $1.3 billion. The state has money saved up that can handle that for a year or two, but it can’t handle that indefinitely. I would see that there’s going to be a slowing of efforts, and perhaps even a reversal of some of the efforts to reduce income tax rates in the state.”

These ongoing issues, along with Iowa’s declining and aging workforce, make it difficult to estimate state tax revenues, he said. 

“Iowa has not exactly been doing well compared to the rest of the U.S. You can look at the period before and after 2018, Iowa basically tracked the rest of the United States in economic growth before 2018. Since then, we have really been lagging in our economic growth relative to the U.S., and that’s partially related to the pandemic and its implications for the retirement decisions of older workers,” Orazem said. “Iowa had a relatively old labor force. And so if you look at 2021, 2022, 2023, 2024, Iowa actually shrank each of the last three years, not by much, by a tenth of a percentage point on average.”

The mix of indicators muddies the economic outlook for Iowa, Orazem said. 

“Projected growth is relatively modest, and the restrictions on international trade are going to give additional downward pressure on growth. I really think we’re going to have mediocre economic growth, and that’s just going to compound the cost of having a massively large federal government,” he said. 

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Check out Episode 1 and Episode 3