A report out of Canada's Scotiabank on the impact of Hurricane Sandy on the U.S. economy raises some interesting points. Let's take a look at a few of the key issues and a bit of background information.
August 2011's Hurricane Irene is estimated by the National Hurricane Center to have caused about $15.8 billion in damages including $7.2 billion worth of inland flooding and $4.3 billion worth of other damage plus an additional $4.3 billion in uninsured damage. This storm ranks in the top-20 of all-time most damaging storms to hit the United States Damage from August 2005's Hurricane Katrina is estimated to have reached in excess of $80 billion, putting it in the number two in the top twenty all time hurricane damage list as shown here:
Let's look at a chart that shows the impact on GDP of major disrupting events including Katrina in 2005, major snowstorms in 2010, Japan's earthquake in early 2011 and Irene in late 2011 (all events marked with a dark vertical line):
Keeping in mind that the storm surges associated with Hurricane Sandy were higher and impacted a much larger portion of the United States than Hurricane Irene, Scotia Economics suggests that a 0.25 percentage point hit to GDP growth in the fourth quarter of 2012 is possible, resulting in a downward revision of Q4 growth to 1.5 percent.
Damage of the ports of New York and New Jersey resulting from Sandy will have some impact on international trade. These ports import about four times as many goods as they export; as a consequence, disruptions at the ports could artificially improve the trade deficit figures (i.e. by lowering the trade deficit) for the months of October and November 2012. Even though both imports and exports could be interrupted, this is a bigger deal to imports since, as noted above, these ports import far more than they export.
On the jobless claims side, the second week of November could show lower than expected new jobless claims figures, largely because government offices were closed and the infrastructure shutdown made it difficult for the newly jobless to make their claims. Once this abnormal drop is past, it is expected that initial jobless claims will spike upwards due to business shutdowns related to storm damage. This is in contrast to the experience after Hurricane Katrina; there was no initial drop in claims prior to the upward spike as shown on this graph:
Here is a look at the drop in job growth after 2005's Hurricane Katrina:
Notice that 2011's Hurricane Irene had little impact on job growth but that the Japanese earthquake of March 2011 had a significant negative impact on jobs. Job growth is expected to decline after Hurricane Sandy but the degree of loss depends on the length of the disruption.
The impact on retail sales is difficult to assess. Prior to and immediately after any disaster, consumers are stocking up on items (i.e. generators) and the demand for building supplies increases strongly after the event, pushing retail sales up. On the negative side, disruption to business lowers retail demand; this could be more evident in the case of Sandy due to the widespread damage to both public and retail infrastructure. As shown on this graph, retail sales after Hurricane Katrina showed a marked drop that was not seen after Irene:
The biggest negative impact could be on the earnings of the insurance sector. Here is a graph showing the drop in earnings per share after both Hurricane Katrina and the major snowstorms of 2010:
Only time will tell us how this massive storm will impact the American economy but, in light of the problems facing Europe, it would appear that the two issues working in tandem may result in a greater impact than would normally be expected.