Damage From Sandy? What About Potential Economic Boost?
Writer CNBC.com Asia
As focus turns to the cost of the damage wrecked by Sandy, one of the biggest storms to hit the U.S., experts say the economy is set for a significant boost from the spending that will result from the need to rebuild homes and infrastructure.
The positive multiplier effect of reconstruction after Sandy could be as much as five times, according to Frank Holmes, CEO and CIO of money manager U.S. Global Investors. If the cost of the damages comes up to $20 billion, the economic boost in terms of spending and activity could be $100 billion, he said.
"America is great at rebounding and it will reinvigorate the economy. When you have committed infrastructure projects by governments, you get this automatic multiplying effect …every dollar is worth $4 to $6, so I think the positive part is going into 2013," Holmes told CNBC Asia's "Squawk Box" on Wednesday. "We're going to get a lot of infrastructure spending."
A boost from reconstruction spending in the months ahead would help the U.S. economy, where a recovery has been slow. The U.S. economy grew a weak 2 percent in the third quarter from a year earlier and last month the Federal Reserve unveiled an aggressive monetary stimulus program to help get the economy get back on track.
Holmes' views echo that of Mohamed El-Erian, Co-CIO of PIMCO, who said on Tuesday that an initial decline in U.S. gross domestic product (GDP) and the destruction of physical wealth will be offset over time by greater economic activity. ( Read More: El-Erian: Sandy's Market Impact—From the Known to the Uncertain)
IHS Global Insight, a forecasting firm, said the storm could end up causing about $20 billion in property damage and $10 to $30 billion more in lost business, making it one of the costliest natural disasters on record in the U.S.
EQECAT, a catastrophe risk modeling firm, estimates that the economic losses from Sandy could amount to $10-20 billion, and insured damage would be about $5 to $10 billion. Insured damage does not include what would be covered by federal flood insurance.
Corelogic, a firm that analyses data, estimates that 284,000 residential properties, valued at $88 billion, were at risk from the storms.
This compares with the $108 billion in damages caused by Hurricane Katrina in 2005, the most destructive storm to hit the United States. The economy slowed in the quarter after Katrina before bouncing back quickly. (Read More: Katrina—Five Years Later)
This means that there will have to be a lot of spending needed to rebuild homes and buildings, especially by the private sector and households, said Uwe Parpart, head of research with Reorient Financial Markets, a dealer and fund manager based in Hong Kong.
"In New York, the subway system is down and in a total mess. There is not going to be electricity in parts of New York City, let alone the outlying suburbs for quite some time," Parpart said on CNBC Asia's "Cash Flow." "So there will have to be some spending on the government side, but the major effort here will be a private led effort and it will be successful and it will actually give a boost to the economy in the first half of next year."
Sectors that will benefit will be homebuilders, construction and engineering firms, materials suppliers, and manufacturers of durable goods, analysts say.
Another area that could receive a boost, at least in the short term, is the jobs market as construction activity ramps up, according to Tim Condon, head of research for ING Financial Markets in Singapore.
"Frankly, the (damage) numbers that are being tossed around are not that large so I'm skeptical that there's going to be much of an impact on the macro numbers," Condon said. "One area that could show up could be employment so that's clearly a positive. That will only be for the fourth quarter, though."
—By CNBC's Jean Chua