David Rosenberg on Hurricane Sandy: Missing the Boat
The following is excerpted from the November 1 edition of “Breakfast with Dave,” a publication from the Canadian research firm Gluskin Sheff:
As I read and digest reports estimating the damage from the devastating storm, I sense that there are far too many economists who are relying too heavily on past major hurricanes as they draw their conclusions from the current experience with Sandy.
I am concerned that as is the case so often, complacency has set in. The consensus view of a mere decimal place impact on Q4 real GDP growth from the storm seems like a pipe dream to me and has not been carefully thought out, in my opinion. Of course the devastation to the capital stock across so many dimensions affects net worth and not GDP, which measures the flow of spending in the economy, but it is indeed the spending portion that has also been seriously impaired, and a good part of it is not coming back and the inevitable pickup in spending of generators, sump pumps, cement and plywood is not going to be enough to provide an offset, at least over the next few months. Logic should prevail more than history here, because there is no appropriate historical comparison, and yes, I include Katrina in that assessment.
Yes, there will at some point be a revival in building activity and repair damage that will support spending and real GDP growth to be sure. But something tells me that this process may be delayed somewhat as the claims get tallied up and the fallout from the disaster continues. That should help out first quarter activity but from a lower level and, of course, assuming that the economy doesn't fall off any fiscal cliff.
The problem is two-fold. One is magnitude. The other is the demographic involved. With regards to magnitude, we are talking about 60 million people being affected, not three, or four or five million spread across corn and cotton fields in the south. There has not been such devastation affecting so many participants in the U.S. economy before. We’re talking about New York, New Jersey, Connecticut and Philadelphia here — not Waco. When such masses do not go to the office, they then don't do what they usually do, which is buy their coffee at Starbucks. They don't line up for pizza and sushi. That spending is not coming back. They are eating at home, and pulling out the box of macaroni and the can of tuna fish they bought three months ago. Then there are movies, sundries and even vacations that are not coming back any time soon into the spending sphere. And the cabs that drive people or the sales people at the clothing store that rings up your hill that have been out of work for the past few days aren't making the money they need to buy burgers and shakes and whatever else. So the ripple effect or what economists call the multiplier also has to be taken into consideration here.