Hurricane Sandy swept through the New York area this week with little regard for anything or anyone in its path. Although a full assessment of damages is yet to emerge, the New York Daily News reported it is expected Sandy “will end up causing about $20 billion in property damages and $10 billion to $30 billion more in lost business, according to IHS Global Insight, a forecasting firm”. Whatever Sandy costs the government, it will still represent just a drop in the existing $16 trillion debt ocean.
The aftermath will also add an extra burden to an already weight-bearing mortgage market. Many home owners don’t hold insurance and are already struggling to pay down mortgages that exceed the values of their home. These home-owners and regions now face massive repair bills, write-offs and relocation costs for the evacuated. The last week of October will be remembered as the most difficult week so far this century and Sandy’s legacy will linger for years.
Prior to Sandy, the US economy was looking relatively promising. A number of economic measures - home starts, employment and consumer confidence – were quite positive and US markets look like having their least volatile year since the 1980s. Due to the location of the damage as well as lessons learned from Katrina, rebuilding efforts have been pre-emptive rather than reactive, with the priorities of getting Lower Manhattan open for business and re-starting the subway system to get New Yorkers back to work.
New York is America’s business epicenter. A long-term hit to private business productivity would apply further pressure to an already fragile businesses environment.
So how will Hurricane Sandy affect the US economic recovery? Well, if the markets are anything to go by, not much at all:
click to enlarge
The Dow Jones Industrial Average jumps into positive territory after markets were forced to close while America weathers the storm
One area that could take a significant hit is employment. Many companies that had already trimmed their balance sheets will be forced to downsize further due to inoperable working conditions and damaged infrastructure. Damage to electricity and telephone infrastructure will result in a loss of income for many small- to medium-sized businesses.
On the other hand, rebuilding efforts will boost many businesses and trades, as insurance companies in particular fund the cost of rebuilding. The same effect was seen in Australia after the floods of 2010/11 and in New Zealand following the Christchurch earthquake, where rebuilding efforts continue.
It’s not all bad news for the US Economy and many of its stocks. Oil production may have taken a hit but oil prices (and hence revenues) are likely to rise. Insurance companies have reinsurance and building companies will see higher sales volumes. Most companies will be unaffected. Investors in Australia may be under the impression that this event spells big trouble for the US Economy. Rest assured that while New Jersey, New York and surrounds have been severely impacted, the long-term effects are unlikely to seriously dent the US recovery.
Up and Onward,