Quantifying the Devastation
First off…thoughts and support to all those affected by the devastation wrought by Hurricane Sandy. As the storm moves on from New York and New Jersey, she leaves a path of destruction in one of most densely populated regions in the United States. Financial markets were at a standstill for days. Power is out for millions on the Mid-Atlantic. Economists – wanting to quantify everything – have already started to pose the question, how will Sandy affect the economy? Numbers seem such a crude medium for talking about a natural disaster like this, but in many ways, it’s all we have.
First, let’s look at how much the storm will cost. To be sure, Sandy will be costly for insurance companies; current estimates of the damage are between US$5 and US$10 billion, making Sandy the fifth most expensive storm. Katrina holds the title as “most costly storm” with US$46.6 billion in insurance losses. If you add damages to infrastructure and public property into insured losses, Sandy’s total damages are estimated to be around US$20 billion. Then, you have to measure Sandy’s effects stoppages in production and slowdowns in sales. Typically, these halts in production and sales are temporary. But, some sales will not be recovered or shifted. For example, restaurant purchases cannot be made up after the storm.
But, as nicely summarized in The Atlantic, not all economic effects of hurricanes are negative. Ahead of the storm, spending may be pulled forward as people stock up on essentials (bread, water, alcoholic beverages, chocolate, and gas – look up the phenomenon of the hurricane party). Afterwards, there are stimulative effects as people restock their groceries, and go back to work, and rebuild. The positive effects from spending on essentials before the store and on repairs, rebuilding, and recovery after the storm may even offset the economic costs. In fact, as also cited by The Atlantic, even the most costly storm to date – Katrina – may have ultimately been stimulative (at least according to one economist).
Another effect will be that on gas prices – typically during hurricanes with both supply disruptions and localized price gauging, gas price spike locally. Of course, if the storm hits the Gulf and damage is widespread (again – Katrina is the example), effects on gas prices will be widespread. Refineries in Sandy’s path halted production so gasoline stock piles are down. However, demand is down too since lots of people aren’t driving (Delaware actually imposed a temporary driving ban), buses are not running, and planes are grounded. So, the demand effect could offset the supply impact.
And finally, of course, the storm can add noise to key economic statistics like jobless claims, retail sales, SAAR, and housing starts. Just in case we economists could not already blame the economy on the weather. Sandy will add more fuel to that fire. While the human toll is assuredly far greater than these numbers, it is also in some ways immeasurable. Perhaps that’s why we focus on economic statistics during these times of trouble – to help us quantify our pain.