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Economic effect of Hurricane Sandy to touch construction industry

By John Stodder

No natural disaster is complete until it touches off a debate among economists.

As the Northeast continues to clean up from Hurricane Sandy, dueling economists are assessing the storm’s effect either as a year-long boost to the domestic economy or as a diverted use of capital that could have been better used elsewhere.

According to the Financial Times, Goldman Sachs “estimated that while the storm would reduce GDP growth by up to 0.5 percentage points in the fourth quarter, it would add ‘slightly more’ than that to growth in the first quarter of 2013.” The company’s chief economist, Jan Hatzius, said there would be “slightly stronger” growth beginning in November and into the first few months of 2013, according to Forbes.

University of Maryland economist Peter Morici was more bullish, writing for Yahoo! Finance that “rebuilding after Sandy, especially in an economy with high unemployment and underused resources in the construction industry, will unleash at least $15 billion to $20 billion in new direct private spending – likely more as many folks rebuild larger than before, and the capital stock that emerges will prove more economically useful and productive.”

Diana Swonk, chief economist at Mesirow Financial, described the hurricane as a “perverse stimulus” on a MoneyWatch podcast. While acknowledging that there were “winners and losers” in the hurricane’s aftermath, she said, “Much of it is infrastructure spending, the subways, all the electrical grids, roadways and all the overtime on that,” all of which will be spent quickly in the weeks after the storm.

Like Morici, Swonk also expects that as homeowners make necessary repairs, “they will start doing upgrades” that they would not have done but for the storm. That improvement, multiplied by thousands of property owners, is where the increments of measureable growth would come from.

Jordan Waxman, managing director of HighTower Advisors in New York also articulated an optimistic view on MoneyLife, an Internet radio show on finance. After acknowledging that the storm will take “a short-term economic hit to GDP,” Waxman said: “[L]onger term, there’s a rebuilding effect, and whether that’s a war or a catastrophe it has a positive impact on construction, materials, energy infrastructure and retail, and I think the snap-back this time is going to be higher than the hit to GDP in the fourth quarter. … [T]hat is long-term bullish for stocks.”

Surely, the storm damage will stimulate hiring. But despite the hiring, the rental of demolition and construction equipment and other expenditures in New York, New Jersey, Connecticut and Pennsylvania, some economists scorn their counterparts who predict the storm will produce a net gain for the economy.

Two deer rummage for food among the ruins of a damaged home in Ocean Beach, N.Y., on Friday. The Fire Island community was among those damaged by Superstorm Sandy. (AP Photo/Frank Eltman)

“I have a standard response to such nonsense,” said columnist Carolyn Baum, writing in Bloomberg. “If wealth destruction is such a good thing, why wait for natural disasters to occur when we could nuke and rebuild our cities on a regular basis?”

Nick Gillespie, of the libertarian magazine Reason, wrote that the surge of stories about Sandy’s hoped-for benefits “confuses short-term spending with long-term economic growth.” Optimists expect that when homeowners receive checks from insurers, many will build bigger houses with more modern appliances, and that wave of property improvements, if they occur, would represent growth, Gillespie said.

But the insurance payouts merely are money that would have been spent or invested elsewhere if not needed for post-storm rebuilding, both Baum and Gillespie said. Moreover, flood insurance payments are federally subsidized, so money is being drawn away from other public uses.

Both Gillespie and Baum cited the 19th-century classical economist Frédéric Bastiat, whose famous “parable of the broken window,” from the essay “That Which is Seen and That Which is Unseen,” addressed the same issue and illustrated why the belief that disasters stimulate economic growth is an alluring fallacy.

Bastiat tells the story of a shopkeeper distressed to learn that his son has broken a window at his shop. His neighbors gather, and one says, “Everybody must live, and what would become of the glaziers if panes of glass were never broken?”

To Bastiat, “(T)his form of condolence contains an entire theory. … (I)t is precisely the same as that which, unhappily, regulates the greater part of our economical institutions.”

The fact is, he explains, by spending six francs to replace the window, the shopkeeper has lost the opportunity to spend those six francs on something else. If the window had not been broken, he could have spent it on a pair of shoes, while still enjoying the use of his window.

But if the shopkeeper had to use those six francs to replace the window, he could not afford shoes, and so the shoemaker’s “labour suffers proportionably by the same cause.”

Applying Bastiat to today:

Homeowners along the Jersey Shore are being forced to spend money to replace or repair their houses. If the houses were still standing, if the storm never happened, that money would be available so they could afford other things, unrelated items they might have wanted, bought from merchants who never knew that the storm recovery cost them sales.

According to David Rosenberg, chief economist and strategist for Canadian investment firm Gluskin Sheff, the optimists are also wrong because of the magnitude of the devastation and the numbers of affected people. Most large hurricanes hit relatively unpopulated areas; Sandy battered an area with 60 million residents, many with relatively fat wallets.

“We are talking about the storm hitting the most free-spending consumers in America,” Rosenberg wrote in an investors’ letter. “And that is also because these are the states with the highest per capita incomes – the major states of the Northeast have on average household spending power that is 40 percent higher than in the deep south where storms and floods have historically been prevalent…

“The impact on GDP from this perspective cannot be over-exaggerated, especially the likely depressing effect on luxury goods and services,” Rosenberg wrote.

John Stodder is the roving Web editor for The Dolan Co., the parent company of The Daily Reporter.

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