Hurricanes Aren't Entirely Bad for the Economy

It's tempting to think that a storm of Sandy's size and intensity will inflict an analogous amount of damage to the East Coast, if not national, economy. We've all heard the estimates by now: tens of billions of dollars in damage, millions of people without power, and more than 15,000 flights in and out of the region canceled. Given these figures, how could a storm like Sandy not have a discernible impact on output?

Yet research on past storms demonstrates that the overall economic impact is marginal at best. While some companies and industries will undoubtedly suffer, others will be enriched. The net effect is thus characterized more by a redistribution of output than simply an across-the-board decline.

The economics of hurricanes
Over the past two days, the news media has fed us a veritable buffet of desolate images from the Eastern Seaboard. The stock exchange is quiet. The New York City subway system is empty. Schools, government offices, airports, and businesses are all closed. And the streets of the nation's capital are littered with fallen trees and electrical lines.

The implication is that these few days of shuttered activity represent a destruction of economic demand. If people couldn't be out buying things, then it must stand to reason that the economy must have suffered. Not so fast.

What this line of thinking ignores is that demand hasn't been destroyed at all. In the lead-up to the storm, throngs of shoppers flooded into the likes of Home Depot (NYSE: HD  ) and Lowe's (NYSE: LOW  ) in search of batteries, flashlights, and whatever else they thought would be helpful in the event of a blackout. You can accordingly look at this in one of two ways: Either the storm created new activity, or it pulled demand that would have otherwise occurred forward.

In the aftermath of a storm, moreover, there are bound to be considerable expenditures on reconstruction. Take Hurricane Katrina as an example. According to Keith Hembre, chief economist at Nuveen Asset Management in this Atlantic article: "You can look back on [the] impact of Katrina; in [its] immediate aftermath, there was an economic downturn in a number of data points. [But] ultimately the rebuilding activity ended up being stimulative."

It's for this reason that many economists think Hurricane Sandy is likely to have, at most, only a marginal impact on the overall economy. "Assuming the storm simply disrupts things for a few days and it doesn't do significant damage to infrastructure, then I don't think it will have a significant national impact," says Mark Zandi, the chief economist at Moody's Analytics.

To add some more substance to this notion, in a study cited by my colleague Dan Newman, researchers compared the economic impacts of 2004 and 2005, both unusually active years for hurricanes. In 2004, which included Hurricane Ivan, jobless claims and consumer confidence both paradoxically decreased while industrial production and gas prices increased. Meanwhile, in 2005, the year that Hurricane Katrina ravaged New Orleans, jobless claims and household energy prices increased, while consumer confidence and industrial production fell.

The takeaway according to Dan: "With the unknowns of Sandy's destruction, it could or could not affect certain economic measures. You're just as likely to flip heads as guess how Sandy will affect the economy."

The Foolish bottom line
Look, make no mistake about it, Hurricane Sandy will affect the bottom line at a variety of companies. Airline companies such as United Airlines (NYSE: UAL  ) grounded all flights in and out of the region on Monday and Tuesday, and financial institutions such as Bank of America (NYSE: BAC  ) and JPMorgan Chase (NYSE: JPM  ) rely on open markets for a significant amount of trading revenue. When all is said and done, however, the resulting impact will pass, just as Sandy is in the process of doing.

To learn more about the most-talked-about bank out there, check out our in-depth company report on Bank of America. The report details Bank of America's prospects, including three reasons to buy and three reasons to sell. Just click here to get access.

John Maxfield owns shares of Bank of America. The Motley Fool owns shares of Bank of America and JPMorgan Chase. Motley Fool newsletter services recommend Home Depot and Lowe's. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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