Destruction wreaked by Hurricane Sandy may reach $50 billion, putting it roughly in-line with the second most devastating storm in postwar history. At the end of the day, Sandy may end up being beneficial for the U.S. economy, pushing indicators like construction spending, industrial production, and retail sales above their pre-disaster trend-lines over the next few quarters, according to Goldman Sachs.
With the American East Coast getting back on its feet, and amid unquantifiable damage to individuals’ lives, initial analysis of the latest natural disaster strike suggests the storm may end up being a good thing from a purely economic standpoint.
According to Barclays’ economic research team, damages from Sandy will cost anywhere between $30 and $50 billion. Following the Bureau of Economic Analysis, they acknowledge that disaster losses are made up of two components (destruction of assets and the disruption of the flow of capital), making them different from economic losses. Goldman Sachs, for example, sees total property losses of $10 to $20 billion (and insured property losses of $5 to $10 billion).
If Barclays’ projections pan out, Sandy would approximate the damage caused by Hurricane Andrew, which in 1992 had a cost of $58.6 billion dollars, but remain well below Katrina’s $113.4 billion from 2005. This would make it a substantial storm, costing a lot more than Irene last year (about $15 billion), Hurricane Rita ($12.6 billion in 2005), Hurricane Charley ($17.2 billion in 2004), and Hurricane Allison in 2001 ($12.5 billion).
In terms of GDP, both Goldman and Barclays expect the effect to be muted. By means of comparison, Hurricane Katrina did manage to push output down by 0.5 percentage points in the second half of 2005 (according to Barclays, Katrina caused a 0.27% hit on the total $40 trillion stock of assets produced in the economy at the time). Goldman’s chief economist, Jan Hatzius, expects the effect on GDP to be essentially negligible, while over at Barclays they forecast a 0.2 to 0.3 percentage point drop in fourth quarter GDP, pretty much to be offset by the rebound in coming months. At the same time, they kept their GDP estimate steady at 2.5%.
“Growth fell markedly after Katrina in 2005, but no significant hit followed the similar hurricanes of 1992, 2004, and 2011,” explained Barclays’ economics research team, justifying their forecast.
Sandy won’t make its mark on GDP, and probably not on the unemployment rate and on nonfarm payrolls either, but it will be visible in economic data. Looking at a series of economic indicators, and going back to the costliest 18 hurricanes of postwar history along with the Northridge earthquake of 1994, Goldman’s research team found that retail sales, construction spending, and industrial production “show a clear dip in the month of the disaster, followed by a significant recovery within 1-3 months that typically takes their growth rate above that seen prior to the disaster.”
Specifically, those three indicators are expected to drop between 0.2 and 0.4 percentage points in October. “However, November/December and perhaps the first few months of 2013 are likely to see slightly stronger growth than would otherwise have been the case,” wrote Hatzius, who estimates those indicators could beat their pre-disaster trend by 0.1 to 0.2 percentage points, and maybe more in the case of construction spending.
Natural disasters cause a great deal of hardship to those immediately affected by them. Sandy has left many casualties in its path and has shaken the U.S. to its roots, but it could have a positive economic impact in the near-term. Companies in the housing and construction sector, like Home Depot, Loews, KB Home, and Lennar, could see a meaningful boost in the coming months from the rebound in activity. Beyond the human tragedy, there may be a silver lining to Sandy.