11/16/12 – The Economic Impact of Hurricane Sandy

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Nov 16, 2012 7:33:53 AM

and tagged Fiscal Cliff, Market Updates

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Hurricane Sandy was one of the largest storms ever to strike the United States, and, because of its path up the East Coast and into the country, it hit areas that are rarely affected by hurricanes. As a result of both of these factors, combined with the timing of the landfall and the tide, the damage was extensive and serious.

As we dig our way out from the wreckage of Hurricane Sandy, it’s natural to ask what the effect of the storm will be on the economy. The already weak economic environment only makes the question more urgent, as any negative economic effects from the storm could easily slow the general economy even further.

First things first. The extensive damage done by the storm—flooding, wind damage, and power loss—will certainly damp economic output in the short term. The size of the storm, which affected 12 states along the East Coast and into the Midwest, dictated that its impact would be widespread. The storm’s timing and strength dictated that the damage would be significant. Finally, the fact that the areas hit were among the most important economically, representing almost a quarter of the U.S. economy, dictated that Sandy’s effects would be material to the nation as a whole.

Short term, there is no doubt that the damage will affect results. As a back-of-the-envelope estimate, the best available at the moment, the storm could knock off around 0.7 percent from quarterly growth for the nation as a whole, but the actual effects will most probably be even less.

This has already started to show up in the short-term statistics. Initial unemployment claims, for example, ticked up substantially in the November 15 report. Economists attribute this almost entirely to the effects of the storm. The most recent retail sales report ticked down, contrary to expectations. This could also be due to the storm, but that is less certain; the numbers for November will confirm whether the drop was driven by Sandy or the fiscal cliff. Interestingly, the consumer confidence figure reported on November 9 hit a five-year high and did not appear to be affected by Sandy. Other reports will also reflect the effects of the storm as they come out.

Offsetting the short-term costs are the economic effects of rebuilding, which will show up over time. While homeowners aren’t better off after spending to replace a damaged roof, the fact that roofers are employed and shingles purchased does add to the economy. Moreover, if the repairs are covered by insurance, rather than by homeowners themselves, the net effect may end up being positive. Homeowners’ spending would not be affected by the repair costs, and the burden of payments for the insurers is likely to fall on Europe-based global reinsurance firms, rather than on the U.S.

Total costs for the storm are estimated at between $10 billion and $20 billion, which is somewhat higher but roughly comparable to Hurricane Irene. Looking at history, the medium- to long-term economic effects of Irene were quite small, and it is reasonable to suppose that Sandy will turn out the same way.

None of this is to minimize the extreme damage, distress, and suffering the storm caused to millions of people, nor to argue that the storm didn’t matter. It did, and many involved will always carry its effects with them. For the larger economy, though, life will go on. While significant in the short term, Sandy’s effects should not be felt to any great extent in the long term.

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Tune into Yahoo Finance's The Final Round on Thursday, March 12, between 2:50 and 4:00 P.M. ET to hear Brad talk about the market. Exact interview time will be updated once confirmed. Watch at finance.yahoo.com

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