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Sandy Won't Ruin the Economy

Jason Stipp

Jason Stipp: I'm Jason Stipp for Morningstar. Sandy cut a destructive and deadly path through the Eastern United States, but will it have a debilitating impact on the economy as well?

Here with me to offer some insights is Morningstar's Bob Johnson, our director of economic analysis.

Thanks for being here, Bob.

Bob Johnson: Great to be here.

Stipp: We do know that the storm has had a deadly impact. There's loss of life, obviously devastating property impact. We are going to talk about the economic impact today.

Let's start with the scope of the storm. What are some of the damage estimates from the effect of Sandy hitting the Eastern part of the U.S.?

Johnson: Well, there are two major modeling companies out there that make estimates of this, and EQECAT is one of them, and yesterday they put out their estimate that we'd probably have $5 billion to $10 billion worth of insured losses, and probably another $10 billion worth of losses that aren't covered for a total of about $20 billion. And the bunch won't be covered because [the damage] was because of flooding, and flooding is generally not covered under insurance policies.

Stipp: Can you put that into context of some other recent storms and the damage that those caused? Was this a big one? How does this fit in the continuum of damage we've seen in the recent past?

Johnson: Sure. I think this will probably end up rating in the top 10 number of storms out there, but on the other hand, it's no Katrina either. In Katrina, the direct economic impact was over $100 billion. And then, by the time we added the rebuilding of the levies and so forth, it was even a much, much bigger the number than that. So we are talking maybe $20 billion here. So we are talking a smaller number, but a still significant number.

And it's also less than Andrew, which was through Florida, which was estimated to be about $55 billion. But [damage from Sandy] will probably be more than Irene was a year ago.

So that gives you a little bit of scope and feel for what it is. It's big, it's important, but it's not the worst we've ever seen.

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Stipp: And Sandy also hit a very populated area of the United States, which accounts for different components of the economy. Can you give a sense of how that population and that population's consumption may have an effect? What kind of percentage of retail sales, for example, are we talking about that could be offline here?

Johnson: Let's start with population. About 20% of the population, or 60 million people, live in the northeast, so that's certainly one way to look at it. It's about 20% of auto sales, so that's a relatively big number. It's 10% of housing starts, which is relatively a smaller number. And then in terms of retail sales, it's about $10 billion a day. And so, if you say they're offline for, say, five days, that's $50 billion. That's kind of the mark where I say, in terms of GDP, that makes a difference.

We've got about $15 trillion of economic activity, GDP in a given year, so that's about 0.03%. But now keep in mind, the government, when they do their calculations, multiplies that number by four to get to an annualized rate, so it could be over a 1% type of effect, if everything just completely disappeared on retail sales for five days.

Stipp: But we know, for example, that that actually won't happen--that there will some offsetting impact. What are some of the factors that would help gain some of those lost retail sales, for example, back?

Johnson: If somebody was going to buy a pair of jeans on Tuesday, they'll just buy them a week from Tuesday. It's something that they needed that will come back. And groceries, maybe you'll live out of the pantry for a while, but then you will have to restock afterward, or maybe you stocked up a little bit before. So those types of things will offset, and that's a fairly big portion of the number.

Where you get a little more of an issue is in the services industries: restaurants for example. If you run a relatively full restaurant most of the time, and you are shut down for five days, there's no way you can put double the number of people in your restaurant over the next few days, so that's certainly an area that hurts.

Anything that's capacity limited like that--airline seats would be another one that you just don't get back. New York, Broadway was shut down, and theater tickets are certainly a big source of revenue for them. Those type of things you don't get back, and those will have an impact on the economy, and that's why it will have an impact on GDP.

Stipp: So let's talk about what the impact could be. You have a sense of how much you think this could subtract. So in the shorter term, and what we see in fourth-quarter GDP, what kind of effect might we have in mind and might we expect from this?

Johnson: Well, let's use Katrina as a benchmark, and there are a couple of other storms we can talk about, too. But that, I think, could bracket the worst-case probably. And in the case of Katrina, it took 0.05% off the quarter that the storm hit, which would be the third quarter of 2005. It took 0.07% off the December quarter, the quarter after the storm. And then added 0.05% in each of the next two quarters of 2006. So you've got that factor where it hurt, and then it helps.

Katrina was maybe amplified a little bit by the fact that we have a lot of oil and gas production down there, which is a part of the GDP calculation. We don't make a lot of oil and gas in New York City, so I don't think we'll have as big of an impact from that as Katrina.

On the other extreme is Andrew, which was 1992, a ferocious storm the knocked down a lot of houses, but it hit in August when there's not a lot of tourism in Florida. There's no manufacturing, no oil and gas there. And that had net no impact on GDP for the two quarters surrounding the storm. So I think that kind of brackets where we might end up.

Stipp: So if you had to guess, somewhere in between there, what kind of effect we may see--and it sounds like we could see it in the fourth quarter and maybe continuing into the first quarter--what kind of negative impact might we have?

Johnson: In some of numbers that I've seen, the best indicator is maybe it would be down a couple of tenths in the fourth quarter. Now we did hit fairly early in the quarter, so maybe that might be the worst of it, a couple of tenths. On the other extreme, I've seen some estimates as high as 0.7%, which strikes me is a little high, because that's how bad Katrina was. So I don't think we'll quite get there either.

Stipp: You mentioned in your answer earlier, some of the effects that may have offsetting [impact], as far as how much we see a detraction. So what about homes and the home damage that we might see from the storm? Could that be bigger than some of the other storms that we've seen for specific reasons?

Johnson: Well that's going to get a little bit tricky. In New York City, for example, a lot of [housing] is high-rises, and yes maybe the basements get flooded of those buildings, and it ruins a little bit of the infrastructure, but many of the apartments above will have met no impact whatsoever.

Katrina blew away 200,000 homes. I don't think that the potential is nearly that high in this storm. So I think what will happen [is], instead of having 200,000 homes completely blown away, you're going to have maybe literally millions of homes with water in the basement, and some [of the damage] is a little bit more severe than that: mud on the first floor level and that sort of thing. I don't want to minimize the damage and the pain that those folks are feeling, but it's a little different than the home being completely gone.

Stipp: You mentioned that energy, obviously, a big industry, down in the Gulf, but maybe not so much of an effect on the energy industry from Sandy?

Johnson: Yes. One of the horrible effects from Katrina was that gasoline prices went up through the roof, partly because some of the oil and gas facilities were actually shut down. Some of it was just ability to ship the stuff.

In the Northeast, yes we've got some refineries that are down, but nobody is driving anywhere, and gas prices, unlike Katrina when they went up $1, they actually have continued to go down this week, even in the face of Sandy going through, and some refineries being shut down.

Stipp: What about folks just not being able to go to work and lost wages and things like that? What kind of an impact might that have? How do you calculate that?

Johnson: That's going to be a tough one to gauge, because on the one hand, people that work hourly and weren't able to go to work, they are not going to get paid, and that's going to have an impact on earnings. On the other hand, a lot people in the New York area work for services firms and knowledge industries that may not have as much of a direct impact on an hourly wage. They may get a bonus, and people in the securities industry will get paid on a different way of thinking than an hourly wage.

Stipp: What about some of the infrastructure damage that we've seen? Perhaps we don't even know yet how bad it is, but things like New York Subway and LaGuardia still are not able to take flights. What kind of effect will that have?

Johnson: I think it could hurt if they stay shut down for long periods of time. On the other hand, if some of that stuff has to be rebuild, along with the houses and some of the other things that we talked about, that's where you get the impacts out a quarter or two, three quarters out, where you start reconstructing. It's unfortunate what happened now, but it's an opportunity to rebuild, and sometimes rebuild better than what was there, and that's going to take construction workers. And that's where we've really been hurting so far in this recovery. So, from that standpoint, if there is one silver lining to this disaster, it's that certainly it's going to act almost as a mini-stimulus plan.

Stipp: So, you mentioned that there can be long-term effects that we might see out into the future that could help the economy in some ways, and you mentioned rebuilding there.

What about some of the things people learn in disasters like this, such as their technology and whether it fails and the kind of things they may need to do to be better prepared next time? Could that have a longer-term stimulative effect?

Johnson: Well, now that it has actually happened here and people have seen it, I think there may be some thoughts about, do I have all my computer data backed up where and how I should? Do I have backup plans on how to operate? Do I need another facility somewhere else? Do I need to buy more computing, do I need to do more cloud computing?

I think the computer industry has been hurting, and maybe this gives that just a little bit of a shot. I think certainly some people might decide Manhattan is a little bit riskier now. This is one storm. We had Irene last year. Maybe I better … have at least another base of operations. So that may actually help some other parts of the country as people make their location decisions.

Stipp: How about insurance and the fact that we are going to see insurance begin to pay out here. How does insurance factor into what some of these effects might be for the economy?

Johnson: Well, I think generally it's a good thing. I think the losses for insurance companies have been very minimal; we've had a mild hurricane season up-to-date--and keep in mind, the year we had Katrina, we had a bunch of [storms], and we had hundreds of billions of losses.

So, this one won't wreck the insurance industry, and it's within their normal reserves, so we'll take that money out and pay it to individuals, who will turn out to go spend it. So, it's a form of forced de-savings, if you will. It gets consumer spending again, which will provide a modestly stimulative effect without ruining the insurance companies, who are in fine shape.

Stipp: So, it sounds like we should expect to see some negative effect on GDP from this storm, but there are lots of offsetting effects, potentially in the short term, but also potentially in the long term for the economy.

Johnson: Well, I really want to stress: What I'm trying to do is not to take advantage of this, but to say don't worry about this wrecking the economy. So many people think we are in a fragile economy--I don't think I am as worried as some people are--but many people think, oh this is just all we need to push us into the gutter. And I really think that this will not be a negative to the economy over the long term, and actually may be a small modest help.

Stipp: All right, Bob. Great insights as always. Thanks for joining me today.

Johnson: Thank you.

Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.