What Hurricane Sandy means for the economy

October 30, 2012

The devastation of Hurricane Sandy is likely to create big distortions — though not lasting effects — in a wide range of U.S. economic measures.

If past major storms and forecasts by economists are a guide, look for industrial production to have taken a dip in October as factories from the Carolinas to New England suspended activity and for housing starts to slow as builders postpone new construction. Retail sales may take a hit but are likely to benefit in November and December, when people buy the supplies they need to rebuild. There could be downward pressure on November employment should some of the employers affected (Atlantic City casinos, for example) be unable to get back to full speed quickly.

The Labor Department’s report on October jobs numbers scheduled for Friday, the last U.S. unemployment report before the election, should be unaffected by the storm because it is based on surveys taken earlier in the month.

Economic activity will slow some in the next couple of weeks because many businesses across the Northeast are shut down. Some will take days to reopen. During the next couple of quarters, there will be an almost perverse boost in overall economic activity, as efforts to clear damage and rebuild houses and businesses add to the gross domestic product.

So far, there are no reliable estimates of the financial damage wrought by the storm, but one pre-storm estimate of $88 billion would imply that rebuilding efforts would add about two-tenths of a percentage point to GDP growth. Although economists generally use GDP as a rough proxy for the overall change in human welfare, this is an area where it fails miserably.

The storm depleted some of the nation’s “capital stock” — houses, stores, and bridges and other infrastructure were destroyed. The country is, in effect, poorer by whatever amount the damage comes to. But the urgent need to rebuild will create jobs and spur economic activity, with the bill paid by insurers and governments.

When Hurricane Katrina struck New Orleans and the Gulf Coast in 2005, the devastation’s effect on national economic indicators was significant but short-lived. At the time, the U.S. economy was adding nearly 200,000 jobs a month, but that number fell to 66,000 in September 2005 and 80,000 in October 2005. The figure rebounded that November: 334,000 positions were added. (A look at state jobs numbers confirms that the yo-yo effect was driven by employment changes in Louisiana and other hurricane-affected gulf states).

But the economic repercussions from Katrina — in which nearly 2,000 people lost their lives and thousands were left homeless — were fairly unique to those circumstances and can’t easily be used as a precedent for measuring the impact of Sandy . The physical damage to New Orleans and other Gulf Coast areas forced thousands of residents to relocate. Katrina also disrupted oil drilling and refining at a key transport node, causing a spike in gasoline prices nationally.

As of Tuesday morning, no major damage had been reported at oil production or refining operations in the areas affected by Sandy. There were reports, however, that many refineries had suspended activity to gird for the storm, so gasoline prices on futures markets rose Monday by nearly 6 cents a gallon for November delivery.

“The supply of petroleum products is being disrupted,” Jason Schenker of Prestige Economics said in a report, “as Mid-Atlantic refiners are running reduced runs, and imports into New York Harbor and other areas are disrupted.”

But rising fuel costs should be short-lived, assuming that refineries can return to normal quickly, as people get back on the roads, airlines resume flights and factories start producing again. Indeed, Schenker argued that due to less demand, the storm would put slight downward pressure on crude oil prices.

One of the reasons it’s so hard right now to predict the economic impact of this major storm is that much of the devastation is without precedent. As of Tuesday morning, trying to determine when the New York subway, airports and tunnels into Manhattan might re-open was a guessing game at best. It’s too soon to know how the economy would react if transport to, from and within the nation’s largest metropolitan area — and its financial hub -- were disrupted for a prolonged period of time.

If there’s a silver lining to be found in past experiences, it’s that sometimes the need to rebuild — to replace older buildings and infrastructure — creates longer-term benefits for communities.

In a 2002 paper published in the journal Economic Inquiry, Mark Skidmore and Hideki Toya analyzed areas that were affected by natural disasters around the world. They found that such events can provide the impetus needed to invest in new and more productive capital.

Think of the intuition this way: Utilities may have resisted investing in underground power lines because of the expense. But after this hurricane, they may be more inclined to bury those lines, significantly reducing power outages during future storms.

That’s one of many economic ripples likely to emerge from the devastation, though it’s perhaps small solace to those who have lost their home to Sandy’s floods,

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