Sandy expected to leave mark on U.S. economy

By Neil Irwin The Washington Post

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

If past major storms and forecasts by economists are a guide, look for industrial production to take a dip in October as factories from the Carolinas to New England suspended activity and for housing starts to slow as builders postponed new construction. Retail sales may take a hit in October 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 jobs numbers should some of the employers affected (Atlantic City casinos, for example) be unable to get back to full speed quickly.

A release of October jobs numbers scheduled for Friday, the last before the election, should be unaffected because it is based on surveys taken earlier in the month.

Economic activity will be lower 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, the destruction will lead to a slight and almost perverse boost in overall economic activity, as efforts to clear damage and rebuild houses and businesses adds 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 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, it created an effect on national economic indicators that was significant but short-lived. For example, 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 of that year. 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 affected gulf states).

The differences between Katrina and Sandy mean that the precedent isn’t precise. The physical damage to New Orleans was such that thousands had no home to return to, so they relocated. 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. However, there were reports 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 less demand due to people staying off roads, airlines canceling flights and factories remaining idle should make fuel-price increases short-lived, assuming that refineries can return to normal quickly. Indeed, Schenker argued that due to less demand, the storm would put slight downward pressure on crude oil prices.

One thing that makes the damage from Sandy hard to predict is that much of its damage is without precedent. As of Tuesday morning, predicting when the New York subway, airports, and tunnels into Manhattan might re-open was a guessing game at best. If there were to be a prolonged period in which transport to and within the nation’s largest metropolitan area were disrupted, it is anyone’s guess how much that might sap overall economic activity.

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

In a 2002 paper published in the journal Economic Inquiry, Mark Skidmore and Hideki Toya analyzed places 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 do so, making outages less common during future storms.

It’s small solace to those who have lost their home to flooding, perhaps, but one of many types of economic ripples likely to emerge from the devastation.