Tragedy of human (not economic) proportions
Taxis sit in a flooded lot in Hoboken, New Jersey. Photo: AFP
THE hurricane that slammed into the north-east of the United States this week produced some compelling and wrenching scenes of chaos and community upheaval, but in economic terms it will be a storm in a teacup.
Estimates of the damage bill have increased from $US20 billion to $US50 billion, and will probably climb. That's a large number when viewed in isolation, but a small one when viewed in the context of the entire US economy. US gross domestic product is running at about $US15 trillion a year, so the cheques that will be written to repair the damage that hurricane Sandy caused represent about one-third of one per cent of America's annual output.
If anything, those cheques will eventually produce a small net economic lift in affected regions, and in the broader US economy there are positive developments.
Retail sales in the affected region were disrupted during the storm and the crucial US retail sales season that begins with the Thanksgiving holiday at the end of this month and runs through Christmas and the New Year may be affected in America's north-east as consumers divert spending to home repairs. That would, however, be a re-allocation of retail spending rather than a contraction: Macy's loss would be Home Depot's gain.
Insurers pay out, but they recoup the money by boosting insurance premiums, and if their shares fall heavily on a disaster event they can be bought, Citigroup says. QBE, which fell 1.6 per cent this week in a fairly flat market, is one to consider, although estimates of its hurricane hit vary widely.
Previous hurricanes including Katrina, the $US81 billion event that sank New Orleans in 2005, Ike, a hurricane that caused $US29.6 billion damage in 2008, and Andrew, a $US26 billion hurricane in 1992 ($US43 billion in today's dollars), all caused local devastation, but did not noticeably shift US GDP, retail sales, construction spending, non-farm employment and industrial production.
''Unlike the earthquake in Japan, there appears to be no lasting damage to major US production facilities that would severely harm US output potential,'' Citigroup economist Steven Wieting wrote this week. ''Severe damage to New York City infrastructure occurred in the aftermath of the September 11 terrorist attack, which had a far more meaningful and devastating impact on national psychology. But from the perspective of US output data, the event is hard to discern.''
Hurricane Sandy's largest impact may in fact be political. There's always a chance of an ''October surprise'' in the run-up to US presidential elections, and Sandy's arrival so close to next Tuesday's election may be it this year.
Disasters are a political positive for incumbents, and the damage inspection tour that President Barack Obama took in New Jersey on Wednesday with New Jersey's Republican Governor, Chris Christie, received national attention.
Just over two months ago, Christie delivered the keynote address at the Republican National Convention that confirmed Mitt Romney as Obama's challenger. It was time to end an era of ''absentee leadership in the Oval Office,'' Christie said. As it coped with the slowest economic recovery in decades and ''a spiralling out of control deficit,'' America needed Romney and his running mate Paul Ryan, ''and we need them right now.''
America hadn't chosen Mitt Romney to lead them when Sandy roared in however, and after joining Obama on Wednesday to inspect the damage that the cyclone caused, Christie said he didn't give a damn about the storm's election impact. ''The President has been all over this and he deserves great credit,'' he said, adding: ''He gave me his number at the White House and told me to call him if I needed anything.''
That's possibly the most powerful endorsement Obama has received during the campaign, and it was backed up by New York City's mayor, Michael Bloomberg, who won office as a Republican and holds it as an independent. In an editorial that ran on his eponymous news service he said the hurricane had brought the election into sharp relief. One candidate ''sees climate change as an urgent problem that threatens our planet. One does not. I want our President to place scientific evidence and risk management above electoral politics.''
Bloomberg went on to say that neither candidate had offered useful clues about how they would fix America's finances, and deal with the looming ''fiscal cliff'' - about $US7 trillion of automatic tax increases and government spending cuts over 10 years that begin feeding in from January 2 as a result of Congress' failure to agree on a $US4 trillion deficit reduction plan.
The consensus is that America's still sub-par recovery from the 2008-2009 financial crisis cannot withstand the automatic fiscal tightening that is scheduled, and attention will swing squarely onto the issue after next week's election.
Many on Wall Street believe Romney will be best placed to strike a deal with Congress that defers or deflects the fiscal cliff, but the election timetable is an obstacle regardless of who wins. Congress has ways to introduce offsetting measures, and either Obama or Romney will negotiate - but the new Congress won't be sworn in until January 3, a day after the fiscal cliff deadline, and the presidential victor won't be inaugurated until January 21.
The US can continue recovering and will probably surprise the markets on the upside if political leaders come up with a debt reduction program that doesn't kill the economy in order to save it.
America's GDP expanded by only 2.6 per cent from the first half of 2007 to the first half of this year, but the 8.8 million jobs that were shed during the global crisis has underpinned a 9.3 per cent rise in non-farm productivity. Australia's economy expanded by 12.3 per cent over the same period, but the productivity gain was lower, at 4.7 per cent.
US housing starts are also now at their highest level for four years (although rental housing is taking a greater share) and a second productivity surge is on the cards as US energy costs fall on the back of the shale gas production boom that BHP Billiton joined last year. America isn't hurricane-proof, but it is definitely making an economic comeback.