The 2012 Presidential election brought its share of surprises. The first and most obvious is the surprising ease with which Barack Obama won re-election. Though the popular vote was close, Obama scored a handsome victory where it counted, in the Electoral College, sweeping all of the so-called battleground states but one, North Carolina. As a result of that victory, a number of up-in-the-air issues, including healthcare legislation and financial reform, will now become settled law.
The second surprise was the amount of damage that Hurricane Sandy unleashed on the northeast coastline of the United States. The storm was the worst to strike that area in over 100 years, and New York, New Jersey and Connecticut will be digging out and rebuilding for months, if not years.
The third surprise was that while talk of the “fiscal cliff”—the automatic steep cuts to the Federal budget that will take place on January 1, 2013 unless the President and an until now recalcitrant Congress reach a deal (to be fair, President Obama hasn’t done such a hot job of negotiating around the problem, either) – has not entirely evaporated, there is a lot more talk around Washington about reaching some sort of deal that will likely include higher taxes on the wealthy, plus cutting loopholes that allow corporations to avoid paying taxes.
If there is no deal in Washington, say the experts, the U.S. will follow the EU and Japan into recession, with a projected GDP decline of 1% and a rise in unemployment back above 9%. The experts, though, are likely wrong.
Why? Hurricane Sandy is the answer. If you take all the losses together – that’s money that insurance companies expect to pay out plus non-insurance losses that will be covered by the Federal Emergency Management Agency – FEMA – the total could reach as high as a staggering $50 billion, according to widely accepted models based upon previous hurricanes and other natural disasters. But it could go much, much higher. Tens of thousands of homes were entirely destroyed, and many of these were expensive homes. Beachfront single-family properties along the Jersey shore go for prices in excess of a million dollars each. Just replacing those houses, according to real estate data source CoreLogic, may cost $22.5 billion. Replacing damaged New York City properties may cost another $35 billion. Throw in $33 billion to municipal infrastructure throughout the state and another $15 billion for New Jersey roads, rail lines and bridges damaged, plus a couple of billion for Connecticut, and the numbers begin to climb. Add in economic losses, and you get to a number somewhere north of $100 billion, which would be a figure approaching 1% of GDP.
In other words, the amount of money spent replacing and rebuilding what Sandy put asunder would be about equal to the economic losses of going over the fiscal cliff. Or, to put it another way, net net it’s a wash. If this doesn’t sound reasonable to you, consider the following: shares of companies like DIY retailers Home Depot and Lowe’s reacted immediately, moving upward after the storm. USG, which makes wallboard, lumber companies, companies that make roofing material, companies that manufacture appliances large and small, and companies that make tools are all expected to benefit from the superstorm and its aftermath. And, of course, there are the manufacturers of electricity generators. Some 8.7 million people were left without power, some for more than two weeks, and every one of those folks said “Never again.” American Honda, Kohler, and other generator manufacturers are going to do an enormous business. These companies are spread all over the nation, so employment will rise around the country. Construction workers will be in short supply, so employment will rise in the Northeast. In addition, net bank lending will likely rise as people borrow to cover the difference between what they get from insurance and FEMA and what they need to rebuild.
Don’t take our word for it. Recently, before Hurricane Sandy hit, Craig Landry and Okmyung Bin, economists at East Carolina University’s Center for Natural Hazards Research, assessed the impact of two large hurricanes on real estate prices in North Carolina. What they discovered was that there was a net benefit from the storms: real estate prices initially dropped, but then not only recovered but rose above pre- storm prices.
A further study by the Federal Reserve Bank of Dallas, in 2010, which examined 13 hurricanes that caused significant damage along the southern coast, showed that the storms caused upward pressure on the housing market, and actually increased values by between 3% and 4% above what might have been otherwise expected. They also discovered that the effect on prices varied depending on an area’s density. In less populated suburbs, values grew less because not as many houses were destroyed and so demand wasn’t as acute, Murphy says. That means prices in high-population areas like Hoboken could rebound quickly, while suburbs like New Brunswick and Edison in New Jersey’s Middlesex County could take longer to come back.
Natural disasters are devastating. The loss of life, the human suffering that can follow on and linger for years, are all effects that we wish could be avoided. But when academics talk about the “creative destruction” of capitalism, industrial restructuring has nothing on Mother Nature. The fiscal cliff, should it come, will likely be completely neutralized by the effects of the storm. If Washington doesn’t come to its senses before the end of this year, the rebuilding effort due to Sandy will at least buy the economy some time. And should Washington in its wisdom act in a positive way, then Sandy will provide a decent push to an economy that could certainly use it.