Is Frankenstorm Sandy a New Form of Economic Stimulus?

As hurricane Sandy moves closer to the Eastern Seaboard Monday morning with 90-mile-an-hour winds, University of Maryland economist Peter Morici estimated that the damage caused by the storm will amount to $35 billion, making it the third most expensive hurricane in U.S. history.

In comparison, Katrina caused $105.8 billion in damages in 2005 and Andrew caused $45.6 billion in 1992.

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Morici told the Washington Business Journal that while the hurricane will have a “devastating impact on life and property,” the rebuilding that will follow could generate $15 billion to $20 billion in private sector spending. However, he cautions that gauging Sandy’s “ultimate impact on an economy, still struggling to overcome the Great Recession but with substantial resources to overcome adversity, is far more complex than merely adding up insurance payouts and uninsured losses.”

Meteorologists have described Sandy as an unusual storm; coming late in the season, the hurricane will combine with cold fronts to the west and the north to produce snow in some states and flooding in others. The New York Times reported that the storm’s devastating landfall Monday evening is expected to “paralyze life for millions of people in more than a half-dozen states in the Northeast, with widespread power failures, a halt in transportation systems and extensive evacuations.” Washington, Baltimore, Philadelphia, and New York have braced for significant damage, and all U.S. equity markets, including the New York Stock Exchange and the Nasdaq, have closed for the day.

However, Morici noted that because hurricane Sandy followed so closely behind Irene, which hit the East Coast in August 2011, the level of preparedness by federal and state officials should mitigate losses. Still, Sandy is expected to impose greater destruction than Irene, which caused damages of $15 to $20 billion.

Once the storm has run its course, “the process of economic renewal, in many tangible ways, can leave communities better off than before,” Morici said.

Already, economic data has shown that large numbers of East Coast residents stopped at Home Depot (NYSE:HD), Lowe’s (NYSE:LOW), Wal-Mart (NYSE:WMT), and Costco (NASDAQ:COST) over the last few days to prepare for the storm. This upswing in microeconomic data, according to Forbes, can certainly be attributed to the hurricane. However, the publication was quick to state that the increase in consumer spending was not a “very-much needed stimulus of the US economy.”

While the storm, which has been given the moniker Frankenstorm, will boost the demand for survival necessities like batteries and water bottles and created jobs in the post-hurricane reconstruction, the effects will be limited. According to Forbes, because Sandy is a one-time event, restricted to a specific geographic location, the storm will not provide economic stimulus for the whole country. The rise in demand for certain items this week will turn into a decline in demand for the same items in the weeks to follow. Furthermore, the extent of the damage, even if it amounts to more than $35 billion, is too small too stimulate an economy the size of the United States’.

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