Sandy set to slow US economic growth

Atlantic Super storm Sandy may cut US economic growth as it keeps millions of employees away from work and shuts businesses from restaurants to refineries in one of the nation's most populated and productive regions.

The storm may cut output in the world's largest economy by US$25 billion ($30 billion) in the fourth quarter, according to Gregory Daco, a US economist at IHS Global Insight. He said that could reduce the fourth quarter pace of growth to between 1 per cent and 1.5 per cent, from the firm's earlier estimate of 1.6 per cent.

Sandy lashed a region with 60 million people - about as many as Italy - that accounts for about a quarter of the US$13.6 trillion US economy, estimates Eric Lascelles, the Toronto- based chief economist at RBC Global Asset Management Inc. It forced the closures of US financial markets, halted air and rail service and idled workers for the federal and state governments from Virginia to Massachusetts.

"If people aren't going to Broadway shows and restaurants and hotels, all those businesses that rely on people spending money are going to take a hit for sure," said Stephen Bronars, a senior economist at Welch Consulting in Washington and an adjunct professor at Georgetown University. "People are still going to go out and buy a car or other durable goods they need, they're just not going to do it this week. There will be winners and losers."

The storm may reduce gross domestic product by as much as 0.2 percentage point this quarter, said Mark Vitner, a senior economist at Wells Fargo. The cost in lost output may come to about US$30b, he said.

The storm will probably have "a modest negative effect of a few tenths of a percentage point" on retail sales, construction spending, and industrial production in October, Goldman Sachs economists led by New York-based Jan Hatzius wrote in a note to clients Wednesday. The indicators then may show "slightly stronger growth than would otherwise have been the case" into the first few months of 2013, they said.

Sandy may cut November same-store sales by as much as 3 per cent after retailers shut locations along the East Coast, according to an October 28 note from Oliver Chen, an analyst at Citigroup in New York. At the same time, supermarkets and home-improvement stores such as Home Depot may benefit.

The physical damage wrought by Sandy is poised to exceed US$20b after the storm slammed into the East Coast, damaging homes and offices and flooding the New York City subway system. The total would include insured losses of about US$7b to US$8b, said Charles Watson, research and development director at Kinetic Analysis, a hazard-research company.

Sandy probably will have a bigger impact on the economy than Hurricane Irene in August 2011, which caused flooding and cut power to almost 6 million US homes and businesses from North Carolina to Maine. One reason: Sandy struck on a Monday rather than a Sunday, idling a larger number of workers, according to Daco at IHS.

"Usually disruptions to business activity are smaller than the infrastructure damages, which was the case with Irene last year," Daco said. "This hit us at the beginning of the week and hence the disruptions are likely to linger through the rest of the week."

Such disruptions may help push total economic losses to US$30b to US$50b, according to estimates by Daco and colleague Nigel Gault at IHS.

The US economy expanded at a 2 per cent pace in the third quarter, to an inflation-adjusted US$13.6 trillion, after climbing 1.3 per cent in the prior quarter. Economists project GDP will grow by 2 per cent next year, according to the median of estimates in a Bloomberg survey.

Some of the loss in economic activity will be recouped during reconstruction, says Mike Englund, chief economist of Action Economics. Days of lost productivity and destruction of infrastructure will be followed by a burst of activity and money spent on repairs.

"On net, the rebuilding effect exceeds the disruption effect, but only by a small amount," said Englund. "We might find by the end of the fourth quarter repair would be a small positive for the quarter. It certainly won't be a negative."

That's the view reflected in a Bloomberg survey of 10 economists. Sandy will cut 0.02 percentage point from growth in the fourth quarter of this year, according to the median forecast. In the first quarter of next year, it will add 0.08 percentage point to growth.

Mohamed El-Erian of Pacific Investment Management Co (Pimco) said the storm damage probably won't cause an economic contraction.

"The wealth of the country has been impacted, however, there is likely to be catch-up activity," El-Erian, chief executive officer at Pimco, said during an interview with the Toronto-based BNN television network. "It's not clear at the end of the day that GDP, which measures activity, would be negative."

Still, while lost production may take "a little bit of a nick out of GDP," the effect is magnified because of the slow pace of the expansion, according to Ken Mayland, president of ClearView Economics.

"When you're only growing 2 per cent, a quarter of a per cent or a half a per cent is getting to be a lot," he said.

- Washington Post/Bloomberg