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As the clear-up begins, a look at Hurricane Sandy's likely economic toll

Published: 10/31/2012
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As the East Coast of the United States awakens to view the devastation of Hurricane Sandy, IHS Global Insight has produced a preliminary evaluation of the macroeconomic impact of the super storm.



IHS Global Insight perspective

 

Significance

Hurricane Sandy is the largest tropical system to have been recorded in the Atlantic Ocean, and it struck the US in one of its most populated and economically-important regions.

Implications

While it is still early to give a full accounting of the cost of Hurricane Sandy, IHS Global Insight has looked back at previous hurricanes to provide a range of macroeconomic impacts.

Outlook

Sandy has caused widespread physical damage, but the bigger macroeconomic impact is likely to come from the virtual shutdown of business activity along key parts of the East Coast. IHS Global Insight provisionally estimates total economic losses of between USD30 billion and USD50 billion, or up to 0.6 percentage point off annualized fourth quarter real GDP growth.

Widespread disruption

Although it is hard to gauge the precise estimate of current and future damages from Hurricane Sandy, the super storm has caused severe infrastructure damage and has already disrupted business activity. Many homes in flood-prone areas along the coast were ordered to evacuate, thousands of flights have been cancelled, and many public transportation services have been closed. Additionally, numerous schools and businesses were shut down while the US securities industry canceled equity trading on all markets on Monday and Tuesday (29, 30 October). This was the first shutdown of the New York Stock Exchange since 9/11, and the first two-day shutdown for weather since 1888. Finally, numerous refineries and a couple of nuclear facilities along the East Coast were either shut down or run at lower capacity.

President Obama has asked the Federal Emergency Management Agency (FEMA) to coordinate efforts with states affected by the hurricane, and he has signed emergency declarations for New York, Massachusetts, Connecticut, Rhode Island, New Jersey, Pennsylvania, Maryland, and the District of Columbia.

A look at prior hurricanes

The current trajectory of Hurricane Sandy has some similarities to that of Hurricane Irene, which pummeled the East Coast in August 2011. Irene left behind a path of destruction worth about USD15 billion – or, about 0.1% of nominal GDP in 2011 – across 13 states. Although the livelihood of many households and businesses was affected by this storm, a couple of factors played a key role in minimising its final impact. First, the hurricane rapidly weakened to a tropical storm as it moved up the coast. Second, the storm made landfall on a weekend, hence reducing business disruptions (although some business activity was affected during the following week by flooding, power losses, and travel disruptions). Unfortunately, none of these mitigating factors look likely for Hurricane Sandy, which is also a bigger storm – so, Sandy's damages should be larger than Irene's.

Hurricane Katrina hit the coast of southeast Louisiana about seven years ago, on 29 August 2005, as a Category 3 hurricane with winds of around 120 miles per hour and a storm surge close to 28 feet in Louisiana. Damage was extensive along the Gulf Coast from Florida to Texas, with the most severe impact taking place in New Orleans, where the hurricane surge protection system failed to contain the storm surge. Katrina is considered one of the most destructive Atlantic hurricanes of all times in the United States, with total property damage estimated around USD120 billion, or about 0.95% of GDP in 2005. And, with a death toll of 1,836 people, it was the deadliest hurricane since the 1928 Okeechobee hurricane.

Fortunately, authorities have been proactive in preparing for this super storm, mandating evacuations of risky zones, reinforcing storm surge systems, and declaring states of emergency in many states. It is hoped that this will limit infrastructure damages and casualties in the wake of Sandy.

National macroeconomic impact versus regional impact

Early estimates of potential infrastructure damages currently stand around USD10 billion of insured damages and about twice as much, or USD20 billion, in terms of total damages. This would put Sandy on a par with Irene in terms of total infrastructure damage, estimated around USD15 billion. However, with Sandy being a much larger storm, it is likely to end up causing more flood damage than its 2011 counterpart, which would increase total damage estimates.

In addition to infrastructure damage, Sandy has forced the idling of about 70% of the East Coast's oil refineries. This does not bode well for the supply of refined oil products, since capacity was already quite tight prior to the shutdowns. We are likely to see an accumulation of crude supply and a shortage of refined products in the coming days, which will inevitably put upward pressure on gasoline prices. Already, on Monday (29 October) the November reformulated gasoline blend stock for oxygenate blending (RBOB) gasoline futures price increased.

Finally, Sandy looks likely to cause major disruptions to business activity, because it hit the East Coast on a Monday (versus on a Sunday for Irene in 2011). The commercial shutdown of the East Coast is likely to result in gross domestic product losses that may outweigh infrastructure damages. And, while some of these losses will be offset by ex-ante "preparation" sales, as well as clean-up, repair, and reconstruction activity – thus lessening the "observable" GDP growth impact in the fourth quarter – part of the loss in economic activity is permanent (for example, spending at restaurants).

Combining all of the above disruptions from Sandy, early estimates point toward total economic losses of around USD30–USD50 billion.

The region affected by Hurricane Sandy will be similar to the one affected by Hurricane Irene in 2011 – an area stretching across 15 states on the East Coast with a gross regional product of around USD3 trillion. Assuming that total economic losses are USD30–USD50 billion, that would represent losses equivalent to 1.0%–1.7% of gross regional product (GRP) for the states impacted.

This would be greater than the damages from Hurricane Irene, which represented about 0.5% of GRP for the 13 most-affected states, but it would be much less than Hurricane Katrina, which caused around USD120 billion in damages, amounting to 9.6% of GRP for the states most affected – Alabama, Florida, Louisiana, and Mississippi.

On a national scale, USD30–50 billion in economics losses would represent about 0.2%–0.3% of nominal GDP. Part of these losses will eventually be made up by reconstruction activity, but it would be naïve to put forward the view that a hurricane is in some sense a stimulus for the economy. There is no guarantee that reconstruction activity will be extra activity, on top of what would otherwise have occurred, rather than a substitute for that activity.

In the private sector, insurance will cover some of the reconstruction costs, but not all. Other reconstruction may take place at the expense of costs pared elsewhere, or simply may not be done at all. And even the reconstruction covered by insurance is not a "free lunch," since it comes out of insurers' profits and perhaps could lead to higher insurance premiums.

Outlook and implications

The effect on growth for the fourth quarter will not be catastrophic, but might still be noticeable, especially in an economy with little momentum anyway. If the affected regions lose just 25% of their overall output for two days that is not recoverable later, it would knock about USD25 billion annualised (USD6 billion actual) off GDP, and could take as much as 0.6 percentage point off annualised fourth-quarter real growth rate. IHS Global Insight will continue to monitor the storm damage, and we will update our thinking as damage estimates become firmer.

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