Why Sandy is starting to boost the economy

The big storm stopped life as we know it for days and weeks along the East Coast. But the spending that's just beginning will give the economy a boost over the next year -- at least.

By Charley Blaine Nov 20, 2012 2:51PM
If you live along the New Jersey coastline and see a front-end loader emptying debris from Hurricane Sandy into a dump truck, think of it as economic growth.

The recovery from Sandy is already starting to stimulate the local and national economies, although many of the effects won't be seen until next year and perhaps longer.
Sandy slammed into the Atlantic Seaboard on Oct. 29, destroying homes and businesses, cutting power to millions for days and even weeks and even forcing financial markets to halt trading for two days. At least 113 people died.

Sandy's immediate effect will be to cut U.S. economic growth in the fourth quarter by a net 0.3%, says Greg Daco, senior economist at IHS Global Insight. The damage and business shutdowns that hurt sales and wages, along with the impacts from power outages and flooding, will cut growth by 0.6%.

But the spending now underway to remove debris, fix flooded subways and replace roofs, furniture and other property damaged by the storm will cut the overall effect by 0.3%. Credit: © Allison Joyce/Getty Images

The effects of the recovery will be felt most in the first and second quarters of next year as home and business repair activities accelerate. (Or as houses are torn down and replaced.) The timing and intensity of the reconstruction efforts will depend on weather, Daco says. A harsh winter will obviously slow the work. But permitting and inspections will slow things as well.

Daco may be one of the more optimistic observers about Sandy's impact. Morgan Stanley economist Vincent Reinhart cut the investment house's fourth-quarter growth estimate to 0.6% from 0.8%. Jobless claims jumped, and manufacturing surveys by the Federal Reserve Banks of New York and Philadelphia show manufacturing fell after the storm.

Daco warns -- as do many economists -- that economic reports coming out in the next few months may miss some of the effects of the Sandy recovery. The data collection methodologies aren't granular enough to separate out recovery-related spending.

But the recovery has started. Home Depot (HD) and Lowe's (LOW) benefitted from spending as people prepared for Sandy. The companies expect to see more spending for recovery repairs in the months ahead. Lowe's shares have jumped 10% since the Friday before the storm. Home Depot is up a bit more than 5%. The Standard & Poor's 500 Index ($INX) is down 2.4%.

Many auto dealers have gotten new business from customers needing to replace vehicles that were totaled by the storm. Daco recently went out to help a friend buy a new car after his was damaged. The showroom was packed with customers also needing to replace cars.

Some effects of the recovery may not be seen for a while. Hurricane Katrina, for example, badly damaged the infrastructure of platforms and pipelines that bring oil and natural gas ashore from wells in the Gulf of Mexico. It took years to bring that infrastructure all the way back, according to economist James Hamilton of the University of California, San Diego.

If your home was damaged and you expect to shell out an extra $20,000 above your claim settlement to renovate your kitchen, you may view your spending as simply protecting what you have. Fair enough. But gross domestic product is measured by what's spent. Why the money is spent is a different question.
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