So Hurricane Sandy is now finally making landfall after a VERY long extended weekend of meteorologists shrugging their shoulders as to where this storm was headed. They were only sure of one thing; it was going to be scary. The storm is so significant that the New York Stock Exchange was closed yesterday and today. That’s the first time the stock market has been closed for two straight days since 1888. They’ve only really got records going back to 1885.
So the stock market is shut down for two days. Millions are likely to lose power, and the most crowded and highest earning populations in the country are going to be out of work for a few days. To say nothing of all the physical damage that will occur. What type of impact to the economy can be expected from a storm this huge?
The short answer is very little actually. Below is a chart from various economic agencies that shows the impact hurricanes Katrina and Rita had on some of the gulf states. It’s showing that after the storms hit there was a drop in GDP but then a recovery as well.
Likewise, this chart shows the economy of Louisiana and the US leading up to and after Katrina. Here we’re seeing what looks like a more dramatic impact of Katrina but we aren’t seeing what the economy would have looked like absent the hurricanes. What is clear in both cases is that there’s an initial ding to the region and then a subsequent recovery. So what’s happening there?
The short answer is quite simple. At first the storm does destroy some things like a few businesses, jobs, and some infrastructure (roads, power lines, etc…). This inhibits the economy’s ability to reach its full potential. But then there’s an influx of money to the economy. Federal disaster aid, donations, and insurance payouts help to rebuild. This cash helps to stimulate the economy.
But the effects aren’t long lived, and the money isn’t really new. That money has to come from somewhere. For instance, an insurance company will have to sell some investments to get the cash they need to pay customers making claims. The federal government will either have to borrow money or divert funds from other budgets to help with disaster aid.
So all one can really hope for is that a storm just doesn’t create any uncertainty. Anything that breaks should be rebuilt quickly. And damaged property should be replaced as soon as possible. The focus for the next few days is safety. Then it becomes about getting back to normal quickly.