Storm Rebuilding Could Boost Economy by $240 Billion

Friday, 23 Nov 2012 10:32 AM

 

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John Cataneo is working his 20 employees overtime and still can’t keep up with demand from customers who need plumbing repaired after Superstorm Sandy. He says he’s hired two new workers and may need more.

“We’re just not getting to some people that are asking for help,” said Cataneo, co-owner of Gateway Plumbing & Heating in Manhattan. “But we’re doing the best we can.”

Cataneo’s experience shows how the storm is giving the U.S. Northeast — and the rest of the country — an economic boost that may eventually surpass the loss of business it caused. Reconstruction and related purchases and hiring may range from $140 billion to $240 billion and increase U.S. economic growth by 0.5 percentage point next year, assuming $50 billion in losses, according to Economic Outlook Group LLC, a Princeton, New Jersey-based forecasting firm.

“Construction costs to rebuild all that was lost will be more than simply replacement because a lot of the work will also involve fortifying structures,” said Bernard Baumohl, chief global economist at Economic Outlook. “We’ll see construction ramped up, and that’s going to bring in jobs and an increase in demand for material of all sorts, and that’s going to further stimulate the economy.”

Estimates of insured damage caused by Sandy range from $7 billion to $25 billion. When lost wages and sales are added, the total comes $50 billion, according to Oakland, California-based catastrophe risk modeler Equecat Inc. — a figure that may be recouped next year as repair and reconstruction efforts spur new building and sales of household goods.

Industrial Production

Sandy may reduce economic growth by 0.25 percent to 0.5 percent in the fourth quarter after it disrupted industrial production, retail sales and employment, according to economists at Goldman Sachs Group Inc. Most of the reconstruction will take place in the first quarter of 2013, adding as much as half a point to growth, according to a Nov. 21 note to clients.

The stimulus is likely to last longer. Insurance claims payments and government funds typically boost the economy for 18 to 36 months after a natural disaster like Sandy, said Jeff Burchill, chief financial officer of FM Global in Johnston, Rhode Island, a policyholder-owned insurer that writes coverage for businesses.

“You get a lot of reconstruction and construction that otherwise would not have occurred,” Burchill said in a phone interview.

Reconstruction following a storm has an effect similar to a government-funded stimulus program, said Gary Schlossberg, a San Francisco-based senior economist at Wells Capital Management, which oversees about $331 billion.

Ripple Effects

“It’s certainly a form of stimulus, no doubt, and the ripple effects of the spending could leave you further ahead than where you were at the start before the storm,” said Schlossberg. “The administration wouldn’t want a hurricane to be a source of stimulus because the costs in losses and suffering outweigh the benefits.”

President Barack Obama last year proposed the American Jobs Act, which would have cut payroll taxes for workers and employers, provided aid to states for schools and emergency workers and increased spending on public-works projects. The $447 billion package was blocked by Senate Republicans.

Economic benefits of the storm will come as homes are repaired, rebuilt and refurnished, according to David Crowe, chief economist for the Washington-based National Association of Home Builders. Buyers of new homes spend an average of $8,000 on furniture, appliances and landscaping, he said.

Housing Construction

The economic boost from housing construction “would take place over several years,” Crowe said, based on the experience of Hurricane Katrina, which struck the Gulf Coast in 2005. “And it wouldn’t start until sometime next year out of the need to plan for what remodeling and construction the homeowner wants to make.”

Sandy made landfall Oct. 29 near Atlantic City, New Jersey, and killed more than 100 people in 10 states. The worst damage was concentrated around New York City and the New Jersey coast, one of the most densely populated regions of the country.

The storm caused more than 20,000 flights to be canceled and left about 8.5 million homes and businesses from South Carolina to Maine without power. In New York, a record storm surge that flooded road and rail tunnels caused the first two- day shutdown of U.S. stock trading for weather since 1888.

Economic output in the New York City region, which includes northern New Jersey, was $1.28 trillion in 2010, according to the Bureau of Economic Analysis — equivalent to about 8 percent of U.S. gross domestic product and greater than Mexico’s economy.

Wal-Mart Damage

Wal-Mart Stores Inc. endured about $36 million in damages from Sandy, Jeffrey Davis, the Bentonville, Arkansas-based retailer’s treasurer, said on a Nov. 15 earnings call. Aramark Corp., the Philadelphia-based global food-service and facility-management company, reported damage at a Long Island depot, disruptions at a Newark plant and power outages at sites in Cherry Hill, New Jersey and Reading, Pennsylvania.

With reconstruction underway, companies likely to see immediate sales gains include Atlanta-based Home Depot Inc., the largest U.S. home-improvement retailer, and next-largest rival Lowe’s Cos. of Mooresville, North Carolina, said Steve Blitz, chief economist at ITG Investment Research Inc. in New York.

Lowe’s shares have rallied 10 percent since Oct. 26, the last close before the storm hit, to a more than five-year high of $34.55 on Nov. 21. Home Depot rose 6.8 percent to a 12-year high of $64.09, extending this year’s advance to 52 percent.

Joe Molaro, owner of Jolad Construction, spent about $500 to buy cement board and adhesive at a Lowe’s store in Toms River, New Jersey. He estimated repairs to his home and two rental properties he owns will total about $120,000.

Flights, Meals

The rebound after Sandy isn’t a sure thing, said Mark Zandi, chief economist at Moody’s Analytics Inc. in West Chester, Pennsylvania. Economic output initially will slump by about $20 billion because “airlines don’t get those flights back and restaurants don’t get those meals back,” he said.

Next year, “we’ll get some of that back as businesses restart like a lot of the manufacturers who shut down, then we have reconstruction and we get most of that back,” Zandi said. “Whether reconstruction gets GDP back above where it would have been otherwise depends on the insurance money and government aid and how people use it.”

New York Governor Andrew Cuomo is asking the federal government for $30 billion in aid for the third most-populous U.S. state. New Jersey Governor Chris Christie has not yet released a damage estimate. State officials have said that they won’t be done tallying the storm’s damage until next week.

Labor Groups

Richard Anderson, president of the New York Building Congress, an association of real-estate developers and construction-industry executives and labor groups, predicted a burst of employment and contracts.

“The building trades are fully engaged — we’re at full capacity now,” Anderson said. “There’s more than 20 million square feet of office space in Manhattan that’s not functional now, so repairs will have to be made. It will take purchases and installation of new equipment.”

While Sandy may have slowed home sales in some areas, there are signs that house hunters are returning, according to Larry Sorsby, chief financial officer of Red Bank, New Jersey-based Hovnanian Enterprises Inc., the state’s largest homebuilder.

New Jersey sales were “pretty good” for the company last week, Sorsby said in an interview. The storm may spur some sales over time as those whose properties were damaged or destroyed look for new homes, he said.

In New York, Cataneo says Gateway Plumbing’s first new hire since Sandy started on Nov. 5, and another will join Dec. 5. His co-owner and brother, David Cataneo, said they may need additional help, especially from people with specialized skills, depending on how much Sandy-related work continues to come in.

“When you’re dealing with gas-fired equipment, boilers and water heaters and stuff, you really can’t hire laborers,” John Cataneo said in a phone interview. “You’ve got to hire people who kind of know their way around the equipment.”

© Copyright 2014 Bloomberg News. All rights reserved.

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