What does Sandy mean for the overall economy?

sandy5.jpgYou don't want to count on natural disasters to provide an economic boost. Yes, there will be some upside as victims of the storm are forced to purchase furniture, clothes, cars, and in some cases homes. (We saw evidence of that after the Northridge earthquake.) But the downside is often greater: lost productivity, property damage, reduced consumer spending, and so on. Economists weighing both sides generally expect a small drop in economic growth, although these early estimates are tricky because they're still just guessing about total economic losses (I've seen anywhere from $20 billion to $50 billion). From Morgan Stanley's David Greenlaw (via Real Time Economics)

Natural disasters result in the destruction of an economy's capital stock and generally lead to a short-term disruption in business activity. In the wake of a disaster, the population -- on average -- experiences a loss of wealth and a reduction in living standards. However, rebuilding efforts can serve to boost economic output. So, a natural disaster is not "good" for the economy but it can contribute to a pick-up in GDP growth for a period of time. The disruption to business activity seen in recent days probably occurred early enough in the quarter to be offset by rebuilding activity and replacement demand for things like automobiles. From a supply side standpoint, any short term reduction in productivity associated with the destruction of the capital stock might be offset by increased labor input. So, while it seems like the overall economic impact associated with Sandy should be fairly modest, it will obviously take some time to sort this out.

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Mark Lacter
Mark Lacter created the LA Biz Observed blog in 2006. He posted until the day before his death on Nov. 13, 2013.
Mark Lacter, business writer and editor was 59
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