Rebuilding is silver lining to Sandy losses

More than 80 homes were destroyed Monday night

More than 80 homes were destroyed Monday night into Tuesday by fire during the height of the megastorm. Economists say that losses like this will slightly impact the economy but will boost it with reconstruction and repair in the long run. (Oct. 30, 2012) (Credit: Getty Images)

WASHINGTON -- Superstorm Sandy is expected to cause as much as $50 billion in losses, but the silver linking is that the economy could benefit from the reconstruction and repairs, economists say.

According to economic forecaster IHS Global Insight, the storm will end up causing about $20 billion in property damages and $10 billion to $30 billion more in lost business.

In the long run, the devastation the storm inflicted on New York City, Long Island and other parts of the Northeast will barely nick the U.S. economy. That's the view of economists who say a slightly slower economy in coming weeks will likely be matched by reconstruction and repairs that will contribute to growth over time.

The short-term blow to the economy, though, could subtract about 0.6 percentage point from U.S. economic growth in the October-December quarter, IHS says. Retailers, airlines and home construction firms will likely lose some business.

The storm cut power to more than 8 million homes, shut down 70 percent of East Coast oil refineries and inflicted worse-than-expected damage in the New York metro area. That area produces about 10 percent of U.S. economic output.

Sandy among 10 costliest storms

Sandy will likely be among the 10 costliest hurricanes in U.S. history. It would still be far below the worst -- Hurricane Katrina, which cost $108 billion in 2005.

But "there is every reason to believe that the hurricane won't kick the legs out of an already-fragile U.S. economy," Caranci said.

Economists expect actual property damages from Hurricane Sandy to exceed those caused last year by Hurricane Irene, which cost $15.8 billion. Irene had little effect on the nation's growth.

Most homeowners who suffered losses from flooding won't be able to benefit from their insurance policies. Standard homeowner policies don't cover flood damage, and few homeowners have flood insurance.

Help for devastated homes

But Fannie Mae and Freddie Mac said they will offer help to borrowers whose homes were damaged or destroyed, who live in designated disaster areas and whose loans the mortgage giants own or guarantee. Among other steps, mortgage servicers will be allowed to reduce the monthly payments of affected homeowners or require no payments from them temporarily.

Across U.S. industries, disruptions will slow the economy temporarily. Some restaurants and stores will draw fewer customers. Factories may shut down or shorten shifts because of a drop in customer demand.

Some of those losses won't be easily made up. Restaurants that lose two or three days of business, for example, won't necessarily experience a rebound later. And money spent to repair a home may lead to less spending elsewhere.

With some roads in the Northeast impassable after the storm, drivers won't be filling up as much. That will slow demand for gasoline. Pump prices, which had been declining before the storm, will likely keep slipping. The national average for a gallon of regular fell by about a penny Tuesday, to $3.53 -- more than 11 cents lower than a week ago.

Shipping and business travel has been suspended in areas of the Northeast. More than 15,000 flights across the Northeast and the world have been grounded, and it will take days for some passengers to get where they're going.

On Tuesday, more than 6,000 flights were canceled, according to the flight-tracking service FlightAware. More than 500 flights scheduled for Wednesday were also canceled.

Sandy targeted wealthy zone

Economists noted that the short-term hit to the economy was worsened by the size of the population centers the storm hit. "Sandy hit a high-population-density area with a lot of expensive homes," said Beata Caranci, deputy chief economist at TD Bank.

Hurricane damage to homes, businesses and roads reduces U.S. wealth. But it doesn't subtract from the government's calculation of economic activity.

By contrast, rebuilding and restocking by businesses and consumers add to the nation's gross domestic product -- the broadest gauge of economic production. GDP measures all goods and services produced in the United States.

Rebuilding is silver lining

Paul Ashworth, chief U.S. economist at Capital Economics, expects the storm to shave 0.1 to 0.2 percentage point from annual economic growth in the October-December quarter. He thinks the economy will grow at an annual rate of 1.5 percent to 2 percent in the fourth quarter. It grew at a 2 percent annual rate last quarter.

But Ashworth said any losses this quarter should be made up later as rebuilding boosts sales at building supply stores and other companies.

"People will load up on whatever they need to make repairs -- roofing, dry wall, carpeting -- to deal with the damage," he said.

Hardest on small businesses

In the short run, Caranci said the economic damage could be worst for small businesses that lack the money and other resources to withstand lost sales. "It will remain to be seen how long disruptions to electricity and infrastructure persist," she said.

But she noted that the storm should help the construction industry, which shed millions of workers after the housing bust. Many who lost construction jobs were skilled employees with disproportionately high pay, and the loss of those jobs hit the economy hard.

Affect on holiday shopping

Major retailers began trying Tuesday to ramp up their operations before the critical holiday shopping period.

Retailers collect up to 40 percent of their annual revenue in November and December. Retailers, excluding restaurants, could lose at least $25 billion in sales this week, estimates Burt Flickinger III of retail consultancy Strategic Resource Group. Because of the storm, he's reduced his forecast for holiday sales to a 2.1 percent increase over last year from the 3.2 percent increase he had predicted earlier.

A blip in insurance costs?

Insured losses from the superstorm will likely total $5 billion to $10 billion, the forecasting firm Eqecat estimates. Insurance losses are typically a fraction of the overall cost.

Chubb, Allstate and Travelers are the insurers most likely to suffer losses, said Greg Locraft, an analyst at Morgan Stanley. Those companies claim a major share of the affected areas.

But "as an insurance event, Sandy is going to be a blip on the balance sheet," said Duncan Ellis, U.S. property practice leader at Marsh, the insurance broker. "2012 has been a relatively catastrophe-free year."

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