Putting Sandy In Destructive Context
Given Sandy's status as 'worse than the worst case', it is perhaps not surprising that our estimate of the total cost being in the $50-100 billion range is not totally off mark given the discussions that ensued. By comparison Katrina's total loss/damage cost was $108bn. BofAML is a little more hopeful with estimates in the $10-20bn range - which seems optimistic to us, and further note that while it is a big hit to wealth, once the offsetting effects (Keynesian broken windows?) are taken into account, it will likely have a very small impact on economic growth. Sandy is still in the Top 5 in terms of economic damage among modern hurricanes, and as BofAML adds, ironically, Sandy may even contribute further to the policy bickering in Washington. With so much of our central-banker-in-chief's efforts focused on raising our wealth perception, we wonder if this will have greater implications than merely the physical damage.
How Bad will Sandy be?
How bad was Sandy?
BofAML: The economic impact of Sandy
As the winds die down, here is our early take on the impact of Hurricane Sandy on the economy. The bottom-line: it is a big hit to wealth, but once the various offsetting effects are taken into account, it will likely have a very small impact on economic growth. Obviously, we believe economic statistics in no way capture the human dimensions of the storm in terms of lives lost and disrupted.
As this note goes to press, Sandy appears to be in the top five in terms of economic damage among modern hurricanes. Table 1 above shows property damage for the top 5--generally speaking about half of this is insured. Judging from press reports, Sandy has had nothing close to the devastation of Katrina, but is worse than Irene. Sandy hit land first in the heavily populated New York area, while Irene hit North Carolina first and had lost much of its punch by the time it arrived in New York. In terms of economic damage, Hurricane Sandy is estimated to be between $10-20bn, according to EQECAT. Our insurance team, led by Jay Cohen, estimates insured losses of $5-15bn.
Overall, the region impacted by Sandy represents about 25% of the US economy. Whereas Irene hit New York on Saturday, Sandy hit on Monday, maximizing the disruption to business. US daily GDP is about $60bn on week days. If Sandy eliminated the equivalent of 2 days of GDP, that's a $30bn drag. All else equal, that's about a 0.8 pp hit to annualized Q4 GDP growth.
Before we take a knife to Q4 GDP, however, history shows that natural disasters early in a quarter are usually offset by increased activity later in the quarter, leaving few visible scars on the macro data. In particular, pent up demand and rebuilding efforts quickly restore activity. Overall we look for a 0 to 0.2% negative impact on Q4 GDP growth, followed by tiny positives in the coming quarters. Of course, there are some notable micro impacts. The shutdown of lower Manhattan may cost Wall Street some trading revenues. In consumer spending, staples and home improvement companies will benefit. However, this will be at the expense of discretionary spending; it may even put a small dent in the holiday shopping season.
Sandy does not have some of the characteristics that have made storms like Katrina so devastating. Katrina caused major damage to the refining industry and hence a major spike in gasoline prices. By contrast, the 5 major refineries impacted by Sandy produce only about 6.5%of the nation's gasoline; they have been only briefly impacted and the drop in consumption of gasoline (and airplane fuel) is probably greater than the lost supply. Sandy is also unlikely to have inflicted the long- lasting damage to regional infrastructure, including a devastated city, ports and transportation along the Mississippi.
Ironically, Sandy may contribute further to the policy bickering in Washington. Recall that Irene caused a major funding clash between fiscal conservatives and liberals over whether to offset the rescue costs with cuts to other programs. Fortunately, it has been a quieter year for disasters and FEMA still has about a billion dollars in spending power. We think Sandy brings similar complications to already stretched local budgets.