Reconstruction Won't Offset Irene Destruction: Economist

While it is far too early to put a value on the damage caused by hurricane Irene to America’s eastern seaboard, it is clear that it could have been far worse.

A family inspects a downed tree in Central Park after Hurricane Irene dumped more than six inches of rain on August 28, 2011 in New York City.
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A family inspects a downed tree in Central Park after Hurricane Irene dumped more than six inches of rain on August 28, 2011 in New York City.

Irene had been downgraded to a tropical storm before it hit New York but President Barack Obama has warned the emergency is not over. “One of our chief concerns before Irene made landfall is the possibility of significant flooding and widespread power outages and we’ve been getting reports of just that from our state and local partners,” Obama said.

It should be easier to get a better sense of the damage as the day progresses, but one economist has dismissed the idea that the subsequent reconstruction work will be good for the economy.

“No one is made better off by the destruction of their home or workplace,” said Ian Shepherdson, the chief US economist at High Frequency Economics in a research report as the storm headed north.

After every major natural disaster you hear people discussing the possible benefits of reconstruction work but Shepherdson dismisses the view that this could be a net win for the American economy.

“The first visible impact will be on jobless claims, which will likely rise next week, some effect is possible this week, but history suggests people fleeing major storms do not stop to file a claim for unemployment before they leave,” he wrote.

While sales of batteries, plywood and bottled water are strong, Shepherdson said this will not offset the drop in spending in other goods and services and will be watching weekly Redbook chain store sales closely.

“With workplaces temporarily empty, industrial production will be depressed in the final weeks of August. The speed of the rebound will depend on severity of the damage,” said Shepherdson, who does believe there could be a rebound in growth in the fourth quarter.

Hurricane Irene - A CNBC Special Report
Hurricane Irene - A CNBC Special Report

“It does not make any sense to argue that the storm is a positive factor for the economy, even if reconstruction temporarily boosts GDP growth,” he wrote.

Shepherdson said that given the extra spending to restore buildings and infrastructure will need to be funded by reduced savings and increased borrowing, the national balance sheet will be damaged.

“Markets focus more or less exclusively on the pace of GDP growth, but the data draw no distinction between spending that potentially enhances the prospects for future growth and spending required to replace something which is functioning perfectly well before the storm blew it away,” said Shepherdson.