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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.

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