10/31/2012 6:45 PM ET|
Will Sandy blow down the economy?
Damages and lost business are estimated at $50 billion. But by rattling consumers and Wall Street, the storm's real toll could be much greater.
Damage from Hurricane Sandy in the Rockaway neighborhood of Queens, New York.
All at once, the plans of men were made to look meek as one of the most powerful Atlantic storms on record roared ashore Monday night. Hurricane Sandy knocked out power to lower Manhattan, flooded the financial district and caused chaos in our nation's largest city. The superstorm cut power to about 8.1 million customers.
One early estimate put overall damage and lost business at roughly $50 billion; that could grow once those miles of subway tunnels are drained of seawater and an army of insurance adjusters puts boots on the ground.
But Sandy will hit the economy in much deeper ways. No, we're not anywhere near the impact from the earthquake/tsunami/nuclear meltdown that hit Japan last year. But given the fragile state of the economy, Sandy could pull growth of the gross domestic product down from 2% toward 0% in the months ahead. Over six months, that could be a loss of output of roughly $140 billion
Combined with other negatives, from the looming "fiscal cliff" in Washington to the ongoing European debt crisis, this will only make life tougher for investors. Here's where trouble will arise, as well as a few ideas on how to protect yourself:
The direct costs
I see three big ways Sandy will affect growth.
The first is through the economic losses that come as damaged and flooded cars are scrapped, furniture is thrown out and subway systems repaired. Initial estimates from Eqecat put this drag at $20 billion -- far from the $280 billion losses incurred in the triple-threat Tohoku disaster in Japan last year. Still, if these initial estimates are correct, Sandy will be the fifth-worst hurricane on record, accounting for inflation, according to the Insurance Information Institute.
In the context of other recent disasters, Sandy is roughly equivalent on this measure to the Russian wildfires caused by the heat wave of 2010, which destroyed nearly 3,000 buildings. (The human toll was much higher in Russia, though, with more than 50,000 people killed).
Both Japan and Russia took hits to their GDP growth rates a result of those disasters. Russia's growth dropped from 1.7% in the second quarter of 2010 to 0.3% during the disaster, before bouncing to 2.3% in early 2011. In Japan, the growth rate plunged to negative 2% before rebounding late last year as government rebuilding efforts revved up.
The consumer impact
The more important consideration, and the one that I think will be have the larger impact on the U.S. economy, is Sandy's influence on consumer sentiment heading into the critical holiday shopping season.
Already, shoppers have been propping up the economy up as businesses pull back. Manufacturing activity has stalled. New orders are down. CEOs have cut back on plans to invest and hire. Inventories are down.
The regional Federal Reserve manufacturing activity reports make for depressing reading. The latest out of the Dallas Fed shows a nasty combination of rising materials costs and plunging new orders.
Yet in the latest report, the Conference Board's Consumer Confidence Index has jumped back above the 70 level (1985=100) for only the third time since the recession ended. More consumers are making plans to buy things like cars, appliances and televisions.
Credit Suisse economists note this is a big reversal from the early stages of the recovery as GDP categories like housing and consumer durables spending have "punched above their weight in the recent quarter" while "business investments and exports have slackened."
To put it in numbers, consumer spending jumped 2% and residential investment surged 14%, while business investment dropped 1.3% and exports fell 1.6%,
The key in all this is that households remain unconcerned about the fiscal cliff -- the package of tax hikes and spending cuts worth some 5% of GDP set to hit on Jan. 1 unless Washington acts. CEOs are acutely aware of it. CEOs tend to have a better read on the situation during major economic turning points. They were nervous in the middle of 2007 before the recession and financial crisis struck, and they were confident in mid-2009 as the recovery was starting. Households were confident in 2007 and nervous in 2009.
I've been expecting consumer confidence to come down later this year as the media starts covering the fiscal cliff in earnest in November and December -- after the election. Sandy's impact could pull it down even sooner, dragging on GDP growth in the fourth quarter.
Again, the Japanese experience is illustrative. Consumer confidence dropped hard from 40.6 during the March 2011 disaster to a low of 33.4 two months later as people watched the mismanagement of the Fukushima reactor meltdown and the slow pace of rebuilding. Consumer spending cooled, as did retail sales. On a year-over-year basis, sales dropped 8.3% in April of 2011 and an additional 4.8% that May.
A similar, if less severe, drop is likely as America's most populous city recovers from record flooding, fires and power outages. Experiences like these lay bare just how fragile modern society is and how quickly things can devolve. Since the economy lives and dies by decisions made on the margins, it's hard to see how this won't have a negative impact as people decide it's best to save a little more rather than splurge.
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Sandy has created infrastructure rebuilding opportunities and thus a lot of jobs, rather than blew down the economy, period.
Unless the article is suggesting that these areas housing, utilities, roads, transportation, electric grid, sewer and water pipes etc will not be rebuilt and the people will be confined to homelessness etc.......
Mother Nature has a way of shaking things up on land doesn't She of the "She Who Must Be Obeyed and Taken Seriously Or Else". LOL
What short sighted meanspirited polititians refuses to do for political reasons although it needs to be done,- eg like the rebuilding and upgrading the infrastructure in this country,- Mother Nature then forces them to do what need to be done for the people or watch a large segment of the American populace stretching over 9 plus States go homeless etc and become very angry.... and in which many of these newly homeless and hating it have guns or access to same... LOL
Anyway there will be a lot of rebuilding going on. It will not be like the bail out of the financial folks where it was just the shifting of money via computer from one group to another group to make some papers/debt whole. Bailing out people by rebuilding their home and rebuilding roads etc is different as folks will actually see what the money is going for this time round.
MIRAGEGUY..... discribing yourself again huh.....but calling yourself Lazy, corrupt,arrogant and stupid.... Oh well, you know yourself best, but on the other hand why don't you give yourself a bit of a break eh?
Oh well 6 days from now we won't have to read your carpings or you beating up on yourself..... well at least for about a few years anyway..... LOL
How can anything ruin the economy worse than 4 years of Obama already have?
The man is Arrogant, Lazy, CORRUPT and Stupid... 6 more days till his firing!
give us a few more businessman like him and we will be electing a new Chairman at the business end of a gun, and eating rice and fish heads!
Now Washington is trying to blame the weather for our crappy economy? What a bunch of complete idiots. The only people dumber than the politicians in Washington, are the Sheeple that continue to vote them into office.
Vote Libertarian for a real change in Washington. The Dem's and Rep's have had their chances and have repeatedly proven they are worthless.
Sandy is estimated to cost 20-30 billion. Obama has cost us over 6 trillion.
Compared to Obama, Sandy is a mere drop in an endless ocean!
The begininng of the end was in 1989 when the banks now called TBTF began their rape of the real estate market. Then, the dot-com bubble, cause dby the Clinton SEC new accounting rules, then the Clinton recession, inherited by George W., then the Freddie and Fannie fraud, with BO and Dodd and Barney leading their defense of their worngdoing.
If one storm can blow down the U.S. economy, what does that say about the fragility of the U.S. economy.
And by the way, isn't this the same economy you were bullish on just two weeks ago?
I'd like to take this opportunity to say to the mainstream media that when there's nothing to say, you shouldn't feel obligated to tell me anything. Really, I'm OK with that.
As usual, the key component of the scenario expressed by our boy Mirhaydari, was completely avoided.
The "Broken Window Theory" refutes the benefits catastrophic events have when the same pool of money is spent buying the same thing twice.
If the window of a store is broken by a rabble rouser, the on-lookers will say to look on the bright side. The money the store owner has to pay replacing the broken window will go into the economy as an increase in the purchase of goods and services.
Listening to the gawkers, the store owner is going to say, how he was planning on buying a new suit. But now, he has to use that money to replace what once was, a perfectly good window, and will not be able to afford the new suit, and what was once a perfectly good window now lies buried in a landfill somewhere.
Think of Hurricane Sandy as the straw that broke the Romney camel's back.
Also, free street and tunnel cleaning for New York.
Rich people are well-insured so I'm not worried about castles by the sea.
Shouldn't we be shooting looters on sight?
Damaged wall of hotel was really illegally-operating hotel of the red light kind so score one for the Hurricane and the forces of good.
What happened to all the homeless people? 50 seems a little low.
When is Disney stock going back up?
Give us something Mirhaydari.
The biggest impact is Republican Governor of New Jersey Chris Christy's glowing endorsement of the help he was getting from Barack Obama whom he praised as "doing a superlative job." President Obama will easily win re-election and Romney can go back to hiding money in foreign bank accounts.
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