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.
VIDEO ON MSN MONEY
"Hypersensitivity and the America's reaction to it destroyed our nation financially. You can't please and accommodate everybody. The PC culture is expensive trying not to offend anyone, no matter how irrational, thus creating more lawyers and wasteful litigation. At the very core, hypersensitivity created a snowball effect that financially destroyed America. Period."
Being PC is about catering to the wealth class from other countries who come here with their hoard of money, escaping their own, before they are taxed / forced / confiscated to give it back. The USA has the most amount of the world's wealth for a reason. We are a haven for the wealth class, with a strong defense, middle class and as a nation of laws. That distinction drives up our land /housing prices as others flock here for safety, opportunity and security. We are a destination; an oasis in an otherwise dangerous world for the wealthy.
The last month we had a Republican in the White House we lost 800 thousand jobs, under Obama we've had 36 straight months of job growth and added 158,000 last month.
Auto sales are up, Homes sales are up, The malls are packed with shoppers, 500 thousand new manufacturing job created, Exports are up 40%, Bin Laden's fish food and His cohorts are dead, I give Obama an A+.
The right wing Taliban evangelical Children of the Corn and the right wing pedophile rapist gay catholic priests backers only goal is to get constitutional amendments to ban abortion and have biblical fairy tale Creationism taught as the true science in all schools. These braindead repukes must never be allowed to get near the White House again.
They could care less about the economy.
"MisterKyte. A toothless freak like you is typical of the repuke dunce party.
Isn't yo mammy calling you boy. Yo roadkill possum is almost cooked up."
THUMBS UP if you agree that artool1 is NOT typical of any party, and just a worthless deranged Schizophrenic.
THUMBS DOWN if you think a loose cannon like him is a benefit to the Democratic party.
"It is not true that all conservative people are stupid; it is true, however, that most stupid people are conservative." - John Stuart Mill, 1806-1873
Even the British people know what lyin Willardo, the Mexican Mormon Moron is like. After criticizing their olympic preparations when he visited there, the British newspapers essentially said "How could any sane American vote for an oaf like this to be their president".
Children are starting to come from school and asking their parents if it is true what their teachers told them. There is going to be a one million man Muppet March in DC on the Sunday before the elections. The kids are asking their parents if lyin Willardo, the Mexican Mormon Moron tax evading draft dodger is really going to defund PBS in order to help lower taxes for his criminal corporate masters?
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- Dec gold continued to trade lower and fell as low as $1216.30 per ounce in overnight trade, its lowest level since January. It managed to inch slightly ... More
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