US economy may avoid direct hit from 'Sandy'

Posted at 10/30/2012 10:25 AM | Updated as of 10/30/2012 11:35 AM
A man walks through a mostly deserted Times Square ahead of Hurricane Sandy in New York October 29, 2012. / REUTERS

WASHINGTON/NEW YORK - Hurricane Sandy is shaping up to be one of the biggest storms ever to hit the United States but even with the severe damage that is expected, the blow to the economy is seen as short-term.

Economists say some of the impact caused by businesses closing will be offset by reconstruction efforts, and point to catastrophic storms like Katrina, which devastated New Orleans but did not deal lasting damage to the national economy.

Still, Sandy's sheer breadth - 10 states have declared a state of emergency - means it could hurt this quarter's economic output, even if the long-term impact ultimately proves neutral.

Gross domestic product in the region between New York and Washington amounts to some $2.5 trillion, so every day the region's economy is halted amounts to about $10 billion in lost output, said Mark Zandi, chief economist at Moody's Analytics.

Peter Morici at the University of Maryland estimates that Sandy will cause about $35 billion to $45 billion in losses and damages but then be followed by as much as $36 billion in recovery spending.

Damage caused by last year's Hurricane Irene totaled as much as $20 billion, he said.

Predicting the impact of Sandy is made all the harder by complexity of the rare, hybrid "super storm" involving other weather systems that could get trapped over the Northeastern United States and amplify inland flooding.

"The range of possible scenarios for Hurricane Sandy remains enormous. There are examples of natural disasters ultimately exacting only minimal toll - Irene - and others having an outsized impact, such as Hurricane Katrina when the (New Orleans) levees broke," said Eric Lascelles, chief economist RBC Global Asset Management Inc. "Really, it is a game of probabilities."

Disaster modeling company Eqecat forecast economic losses caused by Sandy at $10 billion to $20 billion.

The toll from Katrina in 2005 exceeded $100 billion by most accounts. U.S. economic growth slowed in the quarter after the devastation inflicted on New Orleans but bounced back quickly.

The U.S. economy grew 2 percent in the third quarter of 2012, picking up from earlier in the year but still a weak number, as consumer spending helped to offset a worrisome pullback in business investment. Many analysts were already concerned that retail sales could suffer later this year.

Retailers bear a significant brunt of any storm's economic impact as shoppers stay at home. But the last-minute scramble for supplies and emergency goods has a moderating effect on the overall sales declines.

Still, Evan Gold, a senior vice-president at Planalytics, a Philadelphia consulting firm that advises businesses on weather-related matters, was less optimistic about seeing any upside, particularly with Sandy hitting so close to the holiday season.

"If consumers in this part of the country are spending hundreds, if not thousands, of dollars to buy things like generators, or after the storm, to do clean-up, that is likely going to cut into budgets that people might have for their holiday shopping," said Gold.

FORECASTERS CHANNEL METEOROLOGISTS

One thing economists do agree on is that data releases in coming weeks will be even harder than usual to forecast. For instance, the impact of Sandy is likely to skew figures on weekly jobless benefit applications and chain store sales.

"The monthly economic data will become more volatile - October retail sales, vehicle sales, and industrial production will be hurt, but they will bounce back in November and December," Zandi said.

"Restaurants will be hurt, but grocery stores will benefit; general merchandise stores will lose business, but online retailing should get a boost, he added. "Of course, if the storm knocks out major infrastructure like refineries, cell towers, trains, sea and airports, then the economic damage will be more severe and difficult to recover from."

The hurricane has the potential to cause some of the largest losses the global insurance industry has faced this year, but nothing that would strain insurers financially aside from hurting earnings this quarter, according to analysts.

Sandy may also add to the financial headaches for already cash-strapped local governments which will probably have to spend millions of dollars to protect citizens and fix damage from high winds and floods.

But over the long run, they are likely to be able to cope with the extra burden which will be offset by federal aid and rainy-day funds, analysts said.

"Sometimes there are liquidity issues in the beginning but generally, these things have no long-term effects on finances," said Amy Laskey, managing director at Fitch Ratings. "Sometimes the added spending is a positive for local economies."