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ESSAYS ON ISSUES THE FEDERAL RESERVE BANK OF CHICAGO DECEMBER 1993 NUMBER 76 Chicago Fed Letter Assessing the Midwest flood Throughout the Midwest, heavy rains this spring and summer caused the worst flooding on record in many parts of the region. This natural disaster killed 48 people and forced 74,000 from their homes.1 It also disrupted commercial activity all along the Mis sissippi and Missouri Rivers and adja cent areas and destroyed thousands of acres of crops. While the waters have now receded, the ground is so saturat ed that heavy winter snow and spring rains could produce additional flood ing well into next year. This Chicago Fed Letter provides an eco nomic overview of the size and scope of damage from this summer’s flood ing. It also examines the potential impact of a natural disaster such as this on both the regional and the national economy. The scope o f the disaster and the economy o f the affected area As a result of the flood, the Federal Emergency Management Agency (FEMA) has declared 505 counties in nine states eligible for either individual or community assistance. The table shows the distribution of these coun ties by state. Of the nine states, the most severe damage occurred in Iowa, Illinois, and Missouri; within these states, certain counties were particular ly hard-hit, such as Iowa’s Polk County (including the city of Des Moines) and Scott County (including the city of Davenport). These 505 counties contain roughly 10% of the U.S. population and have a per capita income equivalent to the national average. Because of a heavy concentration of farms and agri cultural jobs, population density over most of the area is low. While the affected re gion contains about 11% of total U.S. employ ment, it has nearly 20% of all farm employment. More than 450 of the 505 counties have over 120% of the U.S. average share of persons em ployed in farming. Final ly, the concentration of manufacturing employ ment in most of the impacted area is below the national average. Eligibility for federal disaster relief N um ber of e lig ib le c o u n tie s P e rc e n ta g e o f s ta te 's c o u n tie s Io w a 99 100 M is s o u ri 85 75 M in n e s o ta 53 61 W is c o n s in 48 67 K a n sa s 51 49 S o u th D a ko ta 39 59 N o rth D a ko ta 39 74 N e b ra s k a 52 56 Illin o is 39 38 T o ta l 505 61 Source: Federal Em ergency M anagem ent Agency. The most widely circu lated initial estimates put total losses at $12 billion, with $7 were planted and destroyed, aban billion attributable to crop losses and doned, or otherwise deemed unworthy $5 billion to property and nonagriof harvesting. This “lost” acreage was cultural income losses. As often hap expected to produce 6% of the 1993 pens with disaster loss estimates, harvest of the region’s major crops. these numbers were recently adjusted The states that lost the largest propor downward, to a total of $10 billion.2 tion of their acreage were Missouri At the same time, however, the crop (12%), Minnesota (11%), South Dako production losses are proving to be ta (8%), and Iowa (7%). steeper than initial estimates. Losses In addition to the lost acreage, the may rise again if soil conditions and heavy rains and slow-to-mature crops in high river levels cause new flooding many areas reduced yields on land that with next year’s spring rains. In any was harvested. Final tallies will not be case, a more accurate measure of available until January, but preliminary losses will have to await a final ac projections show that per-acre yields of counting of the damages. corn and soybeans were substantially below normal in five of the nine states. The blow to agriculture In two of those states, Minnesota and North Dakota, about one-third of the Of all sectors of the Midwest economy, expected yield was lost. agriculture clearly suffered the most. The quantity and quality of the harvest The lower yields plus the lost acreage of major crops, particularly corn and significantly reduced the 1993 crop soybeans, were reduced by the floods harvest now winding down in the af and record rainfall. Crop losses oc fected area. Latest estimates suggest curred on land that produced subnor that the region’s corn harvest will be mal yields and on land that produced 29% below the banner level of 1992 no crops. An estimated 9 million acres and 12% below a “normal” year.3 were either unplanted or their crops Similarly, the soybean harvest is down an estimated 19% from last year and 9% below normal. Estimates of the economic value of the crop losses vary widely. Most of the variation depends on whether this year’s crops are mea sured against the record-setting harvest of 1992 or against a more typical one. Using average prices over the past five years, those two measures would place the combined corn and soybean losses between $2.2 and $6.2 billion. Midwest agriculture is still at risk, and post-flood concerns are still apparent. In addition to crop losses, many farms also lost vital structures, facilities, and equipment, some of which have still not been repaired or replaced. Also, many farmers remain concerned about flood protection given the number of levees that failed or were weakened and may not be fully repaired before next spring’s rains. Of the 1,347 nonfederal levees, 1,043 (77%) were ei ther breached or damaged. Federal levees fared better, with only 40 out of 229 failing. Renewed rains in Septem ber—the third wettest on record in St. Louis—hampered levee repair. Weath er has also prevented the Army Corps of Engineers from completing the surveys of damaged levees that must precede repair or replacement. Since many levees are still not functioning properly, repeated flooding in some areas has prevented farmers from re moving sand deposits or completing other post-flood tillage practices on their fields before winter. As a result, many fields are in poor condition and may have reduced yields next year. Damage to property and infrastructure An estimated 45,000 to 55,000 private homes either washed away or suffered major damage, and of these, only 20% carried flood insurance. Much of the coverage was with the federal National Flood Insurance program. Premiums for this program tend to be high (in one Illinois town, for example, $32,000 of coverage costs $350 annually), so homeowners tend to underinsure their property. Between 35,000 and 45,000 commer cial structures were damaged. While many businesses experienced interrup tions or temporary closures, most of these avoided major damage because they had been sited on high ground. The largest problem for most business es was the disrupted transportation into and out of the region. With the important exception of agriculture and some continuing transportation prob lems, particularly on the Mississippi River, most other manufacturing and retail businesses in the area have re turned to fairly normal activity. Virtually all forms of transportation on and across the Mississippi were inter rupted by the flood. Barge traffic on the river between Cairo, Illinois and Dubuque, Iowa halted in early July and resumed on a restricted basis in late August. About 3,000 of the 25,000 barges that normally use the Mississip pi were idled for up to two months, during which time the industry lost $4 million per day. Companies that use the barges for shipping also suffered. Some were delayed in getting their products to market, while others switched temporarily to more expen sive means of transport. the damage will be extremely costly—it will take about $2 billion—but repair is an essential step in returning the re gion’s economy to normal functioning. Federal assistance will compensate state and local governments for up to 90% of these costs. Losses to the U.S. economy The net loss to the U.S. economy from a natural disaster is often overstated by recitations of flood-related damages. In fact, a disaster may only disturb one segment of the economy while simulta neously transferring wealth to another with only a partial net loss overall. For example, revenues lost by waterway freight carriers may be partly offset by revenues gained by overland trucking. Similarly, the supply-induced rise in crop prices that typically follows an agricultural disaster can translate into higher earnings for farmers not hurt by the disaster, and it can significantly cushion the income losses of those whose crop harvest is only partially reduced by it. If one excludes any “loss” reimbursements such as crop insurance indemnities, the economic loss of the foregone crop production is shared between consumers of crops and the farmers whose crops were hit hardest. As bridges, roads, and railroad tracks washed out or were damaged, rail, auto, and truck transportation had to be rerouted. Along the length of the Mississippi that forms the western boundary of Illinois, over 1,000 miles of road were closed and 9 of the 25 nonrailroad bridges were shut down. Truck traffic had to detour, and com muting to work became difficult at best. Railroads had the same basic problem. Approximately 500 miles of track were under water or washed away. Nearly 25% of total U.S. rail traffic passes through the flood area, and rail shipping times were length ened by up to four days because of rerouting. In all, Midwest railroads sustained an estimated $100-200 mil lion in damages. Perhaps the most meaningful defini tion of economic loss due to a disaster is the value of the output of goods foregone—that is, the total net output that would have been produced had it not been for the disaster. Foregone output results for two reasons. First, natural disasters destroy productive capital stock such as roads, bridges and factories, thereby reducing output until such time as the capital stock is restored. It also destroys household ers’ durable goods such as cars and housing. Second, natural disasters can interrupt day-to-day business activity. For example, the flooding closed down otherwise navigable waters and kept workers from their jobs. Public infrastructure, including public roadways and bridges, public buildings, sewers, and water treatment facilities, were also severely damaged. Repairing Foregone output resulting from the flood was reflected in national growth figures for the period. Advance esti mates for the third quarter of 1993 incorporated downward adjustments for both gross domestic product (GDP) and personal income that were due to the flood. Personal income was reduced by $9 billion. Uninsured losses to residential and business prop erty alone reduced rental income of persons by some $2 billion and propri etors’ income by about $1 billion. Such reductions will probably not be apparent from aggregate growth fig ures in coming quarters as vigorous rebuilding begins and normal produc tion activity resumes. Typically after a disaster, aggregate growth figures appear to change initial losses into economic gain as firms and households rebuild their capital stock, and activity in the construction indus try sharply boosts spending and in come. Rebuilding following Hurricane Andrew, along with the resumption of ordinary business, has been credited as partially responsible for the strong annualized national growth rate of 5.7% in the fourth quarter of 1992. However, such rebuilding does not necessarily represent an actual economic gain to the nation. Rather, it may be simply a partial or complete replacement of the capital stock that was lost in the disaster. If this is the case, then in the long term the na tion’s product will probably not exceed what it would have been without the disaster. Actual losses from foregone output may go largely undetected because the diminished growth takes place in small amounts spread over many years. Losses to the region’s economy The losses to a region’s economy de pend partly on who pays for the re building of capital stock. The region itself may pay, or the entire nation may through national tax/spending pro grams and/or through insurance com panies whose owners and customers may be scattered throughout the na tion. If a disaster’s losses are fully cov ered by the national government and insurance companies, and if damages are reimbursed promptly, a region’s losses can be fully offset and higher levels of economic growth can occur than would have otherwise. In the case of the 1993 flood, national coverage of lost capital stock will not be as exten sive as Midwesterners might have hoped. Government disaster aid and private insurance will only partially compensate for agricultural losses and the rebuilding of private homes and other damaged structures. For this reason, even though daily activities have resumed, short-term rebuilding will not be as speedy or extensive as it has been elsewhere after some natural disasters. Moreover, because residents have suffered un compensated personal losses in long term personal wealth such as damaged housing, they may reduce their spend ing in coming years. And because businesses have lost productive capaci ty, the flooding will cause small, hardto-detect reductions in their productive output for years to come. Conclusion The Midwest’s losses from this year’s flooding are not as high as initial as sessments suggested. However, when one considers the real meaning of a region’s economic losses as opposed to popular reports of the flood’s damage, it is clear that the region experienced some very real but hard-to-measure losses. Compared with other short lived disasters such as hurricanes or earthquakes, the flood interrupted daily economic activity for a long time. Moreover, losses to Midwest business and household capital stock will not be fully reimbursed by private insurance and government aid; as a result, the pace of economic growth will be slight ly impaired in coming years. Looking to the future, many Midwest erners are wondering whether to rein vest in private housing and farms locat ed on flood plains. At the same time, the nation’s scientists and engineers are reassessing the system of levees and water diversion projects throughout the Mississippi Basin. Some believe this year’s rainfall may not have been purely episodic, and that the flood’s damage resulted from a combination of intensive land development along the river and an actual inability to prevent flooding despite the extensive system of levees. —GaryJ. Benjamin, Richard H. Mattoon, and William A. Testa 1 Data in this article were derived from a n u m b e r o f sources. N ational an d regional inform ation co n cern in g econom ic growth are mainly from the U.S. D ep artm en t o f C om m erce, B ureau o f Econom ic Analysis. N onagricultural flood dam age data are largely from th e Federal Em ergency M an ag em en t Agency. 2 T he initial estim ate o f p roperty losses from H u rrican e A ndrew was nearly $40 billion. T h at n u m b e r has since been adjust ed to $20-22 billion. 3 A n orm al harvest year is defined as the average an n u al yield from 1987-91, exclud ing th e d ro u g h t year o f 1988. Karl A. S cheld, S en io r Vice P re sid e n t a n d D irecto r o f R esearch; David R. A llardice, Vice P re sid e n t a n d A ssistant D irecto r o f R esearch; Ja n ic e Weiss, E ditor. Chicago Fed Letter is p u b lish e d m o n th ly by th e R esearch D e p a rtm e n t o f th e F ed eral Reserve B ank o f C hicago. T h e views ex p ressed are th e a u th o rs ’ a n d are n o t necessarily th o se o f th e F ed eral R eserve B ank o f C hicago o r th e F ed eral R eserve System. A rticles m ay b e r e p rin te d if th e source is c re d ite d a n d th e R esearch D e p a rtm e n t is p ro v id ed w ith co p ies o f th e rep rin ts. Chicago Fed Letter is available w ith o u t ch arg e fro m th e P ublic In fo rm a tio n C e n te r, F ed eral Reserve B ank o f C hicago, P.O . Box 834, C hicago, Illinois, 60690, (312) 322-5111. ISSN 0895-0164 Light vehicle production rose modestly in September, after declining relatively sharp ly during the summer. The summer slowdown has been attributed to unique assem bly interruptions arising independently of changes in demand. Sales also softened during the summer and early fall, partly because of inventory shortages prompted by the production slowdown. Auto sales strengthened in October, and assembly schedules call for a significant increase in the fourth quarter, as they originally did for the third quarter. The results of purchasing managers’ surveys in Detroit and western Michigan strengthened con siderably in September and October, largely due to responses from the auto industry. A small underbuild still developed in October, however, and any fourth quarter out put gains that do arise will partly represent the recovery of postponed production. S ources: T h e M idw est M a n u fac tu rin g In d e x (M M I) is a co m p o site in d e x o f 15 in d u stries, b ased o n m o n th ly h o u rs w orked a n d kilow att h o u rs. IP re p re se n ts th e FRBB in d u strial p ro d u c tio n in d e x fo r th e U.S. m a n u fa c tu rin g sec tor. A utos a n d lig h t trucks are m e a su re d in a n n u alized physical units, u sin g seasonal ad ju st m en ts d ev elo p ed by th e F ed eral Reserve B oard. T h e PMA in d e x fo r th e U.S. is th e p ro d u c tio n c o m p o n e n ts fro m th e N PM A survey a n d fo r th e M idw est is a w eig h ted average o f th e p ro d u c tio n c o m p o n e n ts fro m th e C hicago, D etro it, a n d M ilw aukee PMA survey, w ith assistance fro m B ishop A ssociates a n d C om erica. IIIS-65S (3l£) PS80-06909 slo u HII ‘oSbdiiio ZV61 ’ON lllA IH 3d S I0N I11I '0 9 V 3 IH 3 a iv d 3 9 v i s o d sn adao3uvat7 + diz 1IVIAI S S V 1 3 -lS d ld a a id o sa a d F£8 xo9 O d J9}U33 u o p e iu jo ju j a g q n j O O V O IH O T O 'T N W T A H T S T d T V H T Q T T j r i r p q p q r aoPDiip )