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Counting the Cost of Super Storm Sandy

As we all know by now, super storm Sandy turned out to be one of the most devastating weather systems ever to hit the Eastern Seaboard of the U.S.

Image Credit: NASAOur office was shut down for over a week, along with many in the Financial District and Lower Manhattan, but the real disaster was felt in communities up and down the coastline, such as Staten Island, the Far Rockaways, and the Jersey Shore.

Counting the Cost of Sandy

High winds and widespread flooding shut down public transportation. Millions of homes and businesses went without electricity for days, in some instances it was weeks, including a much criticized reaction time from the Long Island Power Authority.

The twelve states affected by Sandy’s destructive path typically account for nearly a quarter of the nation’s gross domestic product (GDP), equating to $13 trillion a day in economic output.

Here’s a closer look at the financial toll that this natural disaster could take on the region, as well as the wider United States economy.


A Variety of Losses

According to preliminary estimates, Sandy was responsible for nearly $50 billion in losses from business interruption and property damage. It is almost certain to join the list of most costly storms in U.S. history. Only the devastating Hurricane Katrina in 2005, with $157 billion in damages, and perhaps Hurricane Andrew ($54 billion) in 1992 will top Sandy's financial impact.

Economic research firm Moody’s Analytics attributed about $30 billion to physical storm damage, divided quite evenly among households, businesses, and public infrastructure. The other $20 billion refers to losses resulting from at least two days of suspended business activity. Of course, loss estimates could change as the full scope of damage and necessary repair costs come to light.

A portion of lost business output may have been subsequently recovered, but some types of losses are unlikely to be recouped. Airlines, for example, were forced to cancel more than 20,000 flights, and the two day closure here on Wall Street halted financial market trading, at a cost of up to $7 billion.

Moody’s also reported that New Jersey should account for the lion’s share of lost business output (about 60%), followed by New York City (15%), Philadelphia (14%), and Washington, D.C. (11%).

Ensuring Insurance

Insured losses could range from $10 billion to $20 billion. Fortunately, the private insurance industry is believed to have sufficient capital reserves to cover policyholder claims.

The balance (or uninsured costs) will fall on the broader public in the form of flood insurance payouts and disaster assistance provided by FEMA, as well as on the affected businesses and households. The federal government’s National Flood Insurance Program has received more than 115,000 claims for which payouts could reach $7 billion. Beyond federal assistance, state and local governments and taxpayers may foot much of the bill for repairs and upgrades to public infrastructure such as roads, railways, airports, and water and sewer systems.

Temporary Disruption

Initially, business activity and job growth may take a noticeable hit. Economists have projected that Sandy could cut GDP growth by as much as half a percentage point in the fourth quarter of 2012.9 Some of the storm’s more immediate effects were evident in economic data reported in November, including a slowdown in retail sales and manufacturing.

Stalled business conditions in the affected areas were also responsible for a spike in new claims for state unemployment benefits that should be relatively short-lived. An increase of 78,000 initial claims was the biggest weekly jump since Hurricane Katrina in 2005.

Rebuilding Boost?

Residents and businesses in some hard-hit areas will likely have to endure a long period of hardship and recovery. Sadly, some uninsured and underinsured small-business owners and households could face significant personal financial losses (including reduced asset values and net worth), as well as diminished income.

It could be several months before large-scale repairs and rebuilding of damaged homes, buildings, roads, and bridges are under way. Government money still needs to be allocated and insurance claims must first be settled.

Because wages for construction jobs are typically higher than the average wage, some economists believe that a ramp-up in construction employment could have a modest beneficial effect on the broader economy. As a result, recovery spending could ultimately offset some losses or possibly even contribute to GDP growth in 2013.

Were you affected by Sandy?

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