El-Erian: Sandy's Market Impact — From the Known to the Uncertain
As our thoughts remain with all those who have been horribly affected by the devastation that hit the U.S. Eastern seaboard and its aftermath, we are being asked about the implications of Hurricane Sandy for markets.
Four observations seem warranted based on available information - and they range from the certain to the highly uncertain.
First, the greatest impact is in individual sectors where we may see distinct winners and losers.
Specific segments have suffered demand destruction which will be difficult to reverse in the short term. Think here of airlines, other transportation companies, and parts of the retail sector in some of the major population centers on the East Coast. Some have also incurred higher costs. Business interruption insurance will only partially offset the hit on these companies' operating earnings; and uninsured small businesses and personal sectors will be particularly badly hit.
Sandy Impact on Transportation
The provision of such insurance, while partial, will in turn hit the net income of insurance companies here and abroad; and they will also be meeting much larger P&C claims, making this industry worse off because of Sandy.
Against this, there are companies that will benefit. They are concentrated in segments that will supply goods and services for the reconstruction of homes, businesses roads and infrastructure.
Second, after an immediate negative impulse of several weeks, the impact on GDP as a whole will be mixed to slightly positive.
The upfront decline in GDP and the destruction of physical wealth will be offset over time by greater economic activity. So while the balance sheet of the country as a whole has been negatively affected, there will be a boost to certain components of aggregate demand as some of the delayed activity is made up and reconstruction proceeds.
Third, it is not clear whether policy will play its traditional role in the aftermath of such a natural disaster.
In more normal times, we would look to federal, state and local governments to increase spending, particularly on reconstruction and rehabilitation of infrastructure. Indeed, government assistance to the uninsured and less well-off sectors — both personal and small business — has proven especially valuable in curtailing negative social and economic effects.
But budgets are already under pressure. Meanwhile, the Federal Reserve has already floored policy rates, limiting its ability to assist unless it goes even more unconventional.