Market players interpreting economic indicators over the next several months should be wary of distortions caused by flooding in the Midwest, economists warn.
With rivers still on the rise in several states and a long series of levees breaking, most economists say it is too soon to estimate how much individual reports will be affected.
The indicators in question include figures for inflation, industrial production, housing, employment, personal income, retail sales, and farm output.
"The effects of the floods will show up in reports for several months and people will have to keep that in mind when they sit down to interpret them." said Lawrence H. Meyers, president of Lawrence H. Meyers & Associates, a St. Louis-based economic research firm.
Cynthia Latta, the senior economist at DRI/McGraw Hill, said the floods could make themselves felt in tomorrow's employment report for July. "It's quite possible that some of the effects of the flood could have shown up as early as though it's hard to say at this point." Latta said.
The firm is predicting a rise of 90,000 nonfarm payroll jobs, well below industry expectations of about 175,000.
Economists are keeping to conventional wisdom, which holds that natural disasters tend to depress gross domestic product initially, then boost it later as destroyed regions spend money on cleanup and reconstruction.
Two-Dart System
Latta of DRI/McGraw expects weather conditions to sap about 0.3 of a percentage point from thirdquarter GDP and add about 0.2 in the fourth quarter of the year.
"When it comes to economic data, you normally throw a dart at the wall," Latta said. "But now with effects of the flood, you throw two darts."
Financial market participants will especially need to be on the lookout for distortions in inflation figures, which are likely to be skewed higher because of rising crop prices.
One economist, who asked not to be named, said he believes the floods will add as much as 0.2 of a point to this year's gain in the consumer price index and as much as 0.1 to next year's.
Analysts at the Philadelphia based WEFA Group expect the flood to add 0.1 of a point to the index's gain in the third quarter, on an annualized basts, and 0.2 in both the fourth quarter and first quarter of next year.
Economists generally think that once the current business cycle runs its course, price pressures will moderate again.
Among those who subscribe to this scenario is Joseph Liro, chief economist at S.G. Warburg & Co., who believes that the likely shortage of crops due to the floods "has not been deemed large and permanent enough to become embedded in the general price level."
Liro said recent history shows that supply prospects for agricultural goods can change very quickly.
Economists said the housing sector will get bogged down because the weather has had the immediate effect of deterring construction and home buying.
Therefore the flood's effects on the sector kill probably begin to show up in the months to come, economists said.
Housing starts will also see some distortions from the floods, as conditions have put many building projects on hold. That potential back log of starts, economists noted, will put a drag on future building plans in the region.
Housing Twist
While conventional wisdom points to a resurgence in starts after the flooding dissipates, the nature of this latest natural disaster is different, economists said.
Starts are not likely to get a significant boost because few homes were completely destroyed by the floods. That means much of the construction effort will be classified as repairs rather than starts.
"Housing starts are defined as a breaking of ground, and much of the activity which will take place in the Midwest will be putting homes back together as opposed to starting construction on new ones," said Stanley Duobinis, vice president and director of forecasting at the National Association of Home Builders in Washington.
Duobinis said building completions will be affected because of the sheer wetness of the grounds and the inability of contractors to get their hands on materials to finish jobs.
While building efforts are likely to help construction activity in the future, Duobinis said the flood's effects probably won't hit until the end of the year.
Of the broader economic indicators, temporary and permanent company and plant closings in the Midwest are likely to have implications for employment, personal income, consumption and, ultimately, sales.
"The floods have either closed companies or made it difficult for people to get to work," said Brian Wesbury, chief economist at Griffin, Kubik, Stephens and Thompson in Chicago.
"It's the trickle-down effect. If people don't have money coming in, they won't be doing much buying."
Sales figures in the region are also likely to be swamped by the floods. Wesbury and other economists said that depressed consumer confidence in the region and lack of steady income flow pose serious problems for retailers.
Aside from job income, personal income figures will be hurt by the loss of rental income, as many homes have been evacuated.
"A lot of people are going to lose the rental component of personal income," Wesbury said.
These factors and others will inevitably spill over into U.S. industrial production, economists said. The transportation industry alone, Wesbury said, has been been hit hard by weather conditions in the nation's midsection. Rail traffic has virtually stopped in certain states, he said, while the trucking industry has been idled by bridge and road closings.
With plants and companies unable to receive deliveries and get their hands on vital materials, industrial production in some areas has faltered, economists said.
