Water Shortage Hurts US Economy. Impact on the nation's food stocks could be worse than last year's drought, economist says

R. BRUCE MARTIN may be one of the few people in the United States who can genuinely welcome the drought conditions facing significant parts of the United States. Mr. Martin is president and chief executive officer of Water Control International Inc., based in Troy, Mich. His company, a subsidiary of Sloan Valve Company, makes a low-water consumption flushing system used by plumbing-fixture makers in toilets.

The water shortage troubling large parts of the US is creating a new set of economic winners and losers. Martin's company comes out ahead, precisely because it creates toilet systems that use very little water.

Other enterprises that do well in drought conditions, say economists, include bottlers of water, soft-drink and beverage manufacturers, fertilizer companies whose products offer high yields based on using little irrigation, and long-distance truckers and railroad carriers.

Economic losers, economists say, can include barge companies that face the threat of reduced mobility because of low river levels, car-wash operators in some parts of the US, many farmers and farm-equipment dealers, and, ultimately, US consumers, who could see further pressure on food prices at the supermarket later this year and during the winter of 1989-90.

``The economic impact of drought this year could be even more severe than last year,'' says Nigel Gault, an economist with DRI-McGraw-Hill Inc., an economic consulting firm in Lexington, Mass.

``Last year, the US had a substantial agricultural cushion to fall back on. But we've been using that cushion up. Additional lost output would mean that we wouldn't have the food stocks to fall back on.''

Meanwhile, Martin's main factory is operating at full throttle, turning out as many of its ``Flushmate'' toilet operating systems as it can. Indeed, given the demand for conserving water in many parts of the US, a second factory has just been opened and several additional factories are being planned.

``We will do very well because of the drought conditions,'' Martin says, although he is quick to add that he takes no personal comfort in the unfortunate impact of continuing water shortages on millions of Americans, including farmers and businessmen.

The 1988 drought, says Mr. Gault, added up to a 0.3 percent loss for the overall US economy, in lost national output. He says final US growth for 1988 came in at 3.9 percent. Without the drought, it would have been about 4.2 percent.

``Any additional drought this year would be another substantial kick to inflation,'' Gault says.

FURTHER, the drought has meant an increase of 1 to 1.5 percent in the food and beverage component of the consumer price index. (The food and beverage component makes up about 18 percent of the CPI.) So additional drought, and lost farm output, could put sharp pressure on the CPI later this year, at a time when the Federal Reserve Board may prefer to ease up on credit to reduce interest rates.

Yet, says Gault, given the possibility of higher food prices, as well as an escalating pattern of higher oil prices, the Fed may be operating in a climate of reduced flexibility regarding interest rates.

For much of this spring, concern about drought had shifted from the upper Midwest, which faced significant drought last summer, to the East and West Coasts, as well as parts of the Southeast.

But in the past week or so, concern has been raised once again about the upper Midwest, according to Richard Tinker, a meteorologist with the Climate Analysis Center of the National Oceanic and Atmospheric Administration.

``We're back into drought conditions for eastern and southern Iowa, the far west part of Illinois, northern Missouri, eastern Nebraska, and northern and northeast Kansas,'' says Mr. Tinker.

All of California, he says, is facing drought conditions, except for the northwest part of that state.

Meantime, although there has been some rainfall in the Northeast US in recent weeks, the long-range outlook is still for major water shortages for much of the upper East Coast, from Boston to New York, the Delaware River Basin, and parts of Georgia and South Carolina.

It's still early in the year, however, so the current adverse conditions could yet be reversed by additional rainfall, says Paul Sabol, a meteorologist with the Climate Analysis Center. ``The real danger is when weather conditions are both dry and hot. So far we've only had the first part of the equation.''

Drought in California, where many reservoirs remain below normal, is being closely watched by economists. California is the nation's leading grower of vegetables.

STILL, some food analysts remain optimistic that growing conditions in the Midwest will not duplicate last year's adverse patterns.

``We're feeling much better about the Midwest,'' says John McMillin, a food analyst with Prudential-Bache Securities. But Mr. McMillin notes that there is little margin regarding this summer, following last year's extensive drought in the Midwest; the drought in California, which badly hurt California's vegetable output; and damage to this winter's wheat crop, ``which was down about 15 percent.''

Rainfall has been fairly extensive in the upper East Coast region recently.

``But we're far from being out of the woods for this year,'' says a spokesman for the water supply division of the US Department of Environmental Protection in Boston. ``If we don't have major rainfall between now and early June, then we'll have problems going into the summer.''

The major problem area along the East Coast has been in the Delaware River Basin and New York City.

In New York, Mayor Edward Koch has already designated a water emergency. That means restrictions on such ``nonessential'' purposes as washing cars or watering lawns. Restaurants cannot serve customers water unless asked by a patron.

And the city is cracking down on illegal water users, such as car wash dealers who have not installed mandated low-water consumption systems.

The Delaware Basin region and parts of the Southeast, including Georgia and South Carolina, are major farming regions for the Eastern Seaboard. Significant drought there in the months ahead could help push up food prices, according to agricultural economists.