The Impact of the Midwest Flooding on the Economy
Friday, June 20, 2008PAUL KANGAS: Agriculture officials in Iowa said today that farmers and livestock feeders in the state have lost $3.5 billion to the floods sweeping the Midwest. Thirty one levees along the upper section of the Mississippi River have overflowed, flooding farms and creating logistical logjams for stalled barges and freight shippers. As Jeff Yastine reports, it'll be a tense weekend as the crest of the flooding moves south.
JEFF YASTINE, NIGHTLY BUSINESS REPORT CORRESPONDENT: Towns like Louisiana, Missouri, are the latest to bear the brunt of the Mississippi's flood waters. But the National Weather Service said the levee failures north of St. Louis are actually helping that city by dissipating water away from the river. The Mississippi is expected to crest at St. Louis at 37 feet today. The flooding has hit the commodities and energy markets hard. Corn futures eased slightly today, but are still near a record price of nearly $8 a bushel hit this week. Ethanol prices are also higher, because of the jump in corn futures and transportation holdups. The flooding is sidelining barge traffic and snarling rail networks. Ethanol producers rely on both to get their product to market. River levels are now beginning to drop in towns like Iowa City first hit by flooding last week. Authorities are hoping they don't see a repeat of these scenes in the rich farmlands below St. Louis this weekend. Jeff Yastine, NIGHTLY BUSINESS REPORT, Miami.
PRATT: Earlier today, I spoke with Gary Thayer, senior economist at Wachovia, about the economic impact of the Midwest floods. I began by asking him how the U.S. economy will be most affected.
GARY THAYER, SENIOR ECONOMIST, WACHOVIA: Well, I think what we're going to see from the flooding is an impact, of course, in the area we've had significant dislocations of jobs and damage to a lot of communities up in the flooded areas. But I think more than that, we've seen a spike up in commodity prices, which will over the next year our so probably add to the inflation problems that a lot of people are feeling right now and that will probably further pinch consumer budgets and make them a little bit less positive on the economy and maybe hold back on spending a bit more.
PRATT: Now, food inflation is already up about 5 percent this year. What kind of impact do you expect to see higher prices for corn and soybean and potentially for livestock? What kind of impact will those price increases have on general food inflation for the economy?
THAYER: Well, before the floods, corn prices were up about 50 percent for the year and now after the floods, we're seeing corn price up about 80 percent from year ago levels. That's actually a bigger increase than what we saw back in 1993 when we had the major flooding. At that point in 1993, we had about a 40 percent increase in corn prices that only pushed up food prices about 3.5 percent the following year. So this is bigger in far as its impact on the commodity markets and it will probably push the food inflation above the 5 percent level, maybe up to 6 percent or so over the next year. After all, corn goes into a lot of commodities.
PRATT: Speaking of those 1993 floods, I mean, comparatively speaking so far, the economic impact, which do you think is going to be worse? Do you think these floods have the potential to have a greater effect on the U.S. economy than those of 15 years ago?
THAYER: I think it's going to be pretty close. Right now we're hearing reports of a lot of damage, of course up in Iowa, and I think that when all is said and done that there's probably going to be a very close to the severe level of damage that we saw in 1993. So hopefully we won't see a lot more rains until the floodwaters subside a bit further. But it does look like this has been a major event.
PRATT: There are some economists who believe that there is going to be some impact to data that's coming out for June and for July, things like retail sales, payrolls, jobless claims. What about you? What's your opinion on that? Do you think we're going to see a lot of variation or volatility in those numbers because of the floods?
THAYER: Yeah, I think we could. I mean, another experience that we've gone through was the hurricane Katrina and Rita back in 2005. We didn't see that kind of volatility after those storms hit along the Gulf coast. Of course, that was a much bigger area. A lot of people were dislocated after those floods in that area. But we probably will see over the next couple of weeks some distortions in the economic data. Hopefully it won't be too severe because obviously we haven't had quite the population movements like we saw after Katrina and maybe some of the people who have been flooded out will eventually be able to get back a little quicker than they were after Katrina.
PRATT: When do you think we're going to know the full economic impact of these floods? Is this something that we're going to be feeling for the rest of this year?
THAYER: I think so. I mean right now I think the markets are moving on a lot of anecdotal stories that we're seeing about the flooding and a lot of the reports from the flooded areas and how severe it is. But I think from this point going forward, we're going to be getting a lot more concrete information. And I think that kind of information is going to help us better evaluate what we're actually dealing with. And I think it is something that's probably going to affect the economy through the end of the year because we do potentially see a lot of rebuilding in those areas that are damaged.
PRATT: OK. Gary, I think we have to leave it there. Thank you for joining me.
THAYER: OK.
PRATT: My guest, Gary Thayer of Wachovia.
