Will Sandy prove a stimulus? Economists dubious

If you have been sitting for nearly a week in a cold, dark house with a flooded basement, a tree resting on your roof, and food decomposing in the refrigerator, it's unlikely you will be able to see anything good coming out of Hurricane Sandy.

Yet there are some, especially in the housing industry, who already are predicting that the massive cleanup and reconstruction effort in the months to come will be a second stimulus for the economy.

Define stimulus more broadly than rebuilding and repairing homes swept into the storm's destructive path, and most observers suggest that whatever economic activity is being spurred will just come at the expense of something else - a classic good news/bad news scenario.

Moody's Analytics chief economist, Mark Zandi, who is based in West Chester, said it appears that "the rebuilding from Sandy will provide a boost to growth into early next year, but it will be a very modest boost."

"It certainly won't be large enough to offset the coming economic drag from the fast-approaching fiscal cliff," he said.

Economist Kevin Gillen, senior research consultant at the University of Pennsylvania's Fels Institute of Government, recalled that after Hurricane Katrina in 2005, similar expectations never were realized.

"Tons of federal money poured into New Orleans after Katrina," Gillen said. "Did you see their economy boom?"

Though he agreed with Gillen's assessment, Robert Denk, senior economist at the National Association of Home Builders in Washington, suggested dismissing Katrina as the wrong comparison, saying that rebuilding will begin showing up statistically as remodeling expenditures rather than housing starts, which is "bad news for affected homeowners, but good news for struggling builders."

Gillen said people who believe disaster relief can provide some type of "Keynesian stimulus to the affected region" hold that destruction of property can be a good thing because it results in employment for people who make repairs, and thus stimulation for the economy.

In point of fact, he said, money spent on repairs would have been used on something else, and likely have made the spenders better off.

In addition, Gillen said, the money for rebuilding will have to come from somewhere else - federal funding, for example.

"Money reallocated to us is money reallocated away from somewhere, and someone, else," he said. "So our region's boost would likely come at the expense of someone else's bust."

In a PowerPoint presentation developed Thursday, Zandi put output lost because of the storm at $20 billion during this quarter, and estimated property damage from the storm at $30 billion.

If you assume that $17.5 billion is rebuilt in the quarter, and $12.5 billion is completed in all of 2013, "the real impact on the GDP is very small," he said. "We have not changed our GDP outlook as a result of Sandy."

Gregory Daco, senior principal economist at IHS Global Insight in Lexington, Mass., said it would be "naïve to put forward the view that a hurricane is in some sense a stimulus for the economy."

"There's no guarantee that reconstruction activity will be extra activity on top of what would otherwise have occurred, rather than a substitute for that activity," he said.

Insurance will cover some of the costs in the private sector, Daco said, but not all.

"Indeed, insurance does not cover all types of damage, and individuals do not always insure all goods and infrastructure," he said.

"And even the reconstruction covered by insurance is not a free lunch since it comes out of insurers' profits and perhaps could lead to higher insurance premiums," Daco said.

Kermit Baker, chief economist for the American Institute of Architects, said whatever contribution rebuilding after Sandy makes to the housing economy would be minimal, at best.

Nationwide, the current construction industry amounts to about $850 billion a year in spending, Baker said, with about one-third residential buildings, 40 percent nonresidential, and 25 percent public-sector work.

"From a national perspective, the $5 billion or so likely to result from building and rehabilitating homes, and a comparable figure for buildings, is not likely to have much of an effect on business levels at architecture firms," he said.

From a regional perspective, these figures are more significant, Baker added.

"Since the rebuilding activity is likely to play out over several years, however, it's not likely to be a dominant source of new project activity, even for architecture firms that work exclusively in the New York, New Jersey, and surrounding areas," he said.

Denk, the home builders association's economist, said he doesn't think the rebuilding effort will have as much impact on new-home numbers as it will on remodeling, even if houses are built to replace those destroyed by storm surge or high winds.

Where there might be some impact is on building materials' manufacturers. Philadelphia-area builders, operating on already-thin profit margins, have been reporting higher materials prices, both current and pending.

"Prices of some things like concrete are flat," Denk said, but gypsum and oriented strandboard "are two areas where manufacturers, because of the long drought in housing, reduced production capacity."

These manufacturers have not been eager to increase capacity until they got the sense that recovery was sustainable and they wouldn't lose money doing so.

Some believed that 2010 was bringing recovery and were burned when that didn't materialize, Denk said.

Industry observers said there was a long shot that the rebuilding effort might give the materials manufacturers the confidence they need to ramp up production, which would make recovery from the housing downturn easier down the road.

Already, the new-home industry is experiencing a "completely natural, unassisted and consistent recovery," Denk said, and "lumping Sandy on top of that might be the nudge" it needs.