New York Times: Awaiting the Storm’s Price Tag
Oct 29, 2012
The following article was published in The New York Times on October 29, 2012:
By Nelson D. Schwartz
Hundreds of big stores shut tight from the Carolinas to Maine. Traders and investors paralyzed as the stock market and most major exchanges closed. Millions of workers stuck at home for another day.
Even as businesses struggled on Monday to gauge and contain the damage from Hurricane Sandy’s slow move up the East Coast, economists played down the likely long-term effects. The recovery after the storm, they said, could actually pump up growth temporarily in a few sectors, like construction and retail sales, when cleanup begins in earnest in a few days.
Immediately, though, the focus was on just how long it would take for business to resume as financial markets, department stores, and most big companies announced plans to close Tuesday for the second day in a row. Unlike some hurricanes that blew through in a day, Hurricane Sandy was projected to linger over the Northeast for much of the week, broadening the short-term fallout.
Over all, economic losses from the storm could range from $10 billion to $20 billion, according to an analysis by Eqecat, a firm that performs catastrophe risk modeling for the insurance industry and government. On that scale, big insurers might account for $5 billion to $10 billion in losses.
“We think it’s going to be big,” said Tom Larsen, senior vice president and product architect at Eqecat, suggesting the toll could fall somewhere between that of Hurricane Ike in 2008 and Hurricane Irene last year. “Broad areas are going to be subject to high winds for a longer period of time than in a normal Category 1 storm.”
Of course, some sectors will be hurt more than others. A study last year by the Global Business Travel Association estimated that a typical Category 3 hurricane on the East Coast could reduce spending on business travel by just under $700 million.
Hurricane Sandy was a Category 1 storm, which is significantly less powerful than a Category 3 hurricane, but its extended stay throughout the East Coast could actually result in higher losses than the study found, said Joseph Bates, the association’s vice president for research.
“The scenario we looked at only had an impact of one day,” he said. “This storm is going to last at least three days.”
Besides the halt in electronic and floor trading in virtually all Wall Street financial markets Monday and Tuesday, several prominent companies delayed scheduled announcements.
Pfizer, the big drug maker, put off its third-quarter earnings report until Thursday, while Thomson Reuters and NRG Energy delayed their reports until Friday.
Google canceled an event planned for Monday to introduce a new smartphone, the Nexus 4, as well as several new tablets, all aimed at the holiday shopping season. Facebook also called off an event showcasing its new Gifts platform, which had been set to take place at F.A.O. Schwarz in Manhattan on Thursday.
Major retailers began closing New York stores on Sunday afternoon.
Saks Fifth Avenue boarded up its flagship store in Manhattan, a striking image for a retailer known for its high-fashion windows.
“We have taken the necessary precautions in each store to protect our property and limit damage,” said a spokeswoman, Julia Bentley, in an e-mail. Saks closed stores in nine other locations from Maryland to Boston.
On Monday, about 130 of the 850 Macy’s and Bloomingdale’s stores nationwide were closed, said a spokesman, Jim Sluzewski.
“We’re not selling generators or bottled water or any of those sorts of items, so given that much of what we sell is discretionary, it’s not as big of an issue for our customers,” he said.
Sears Holdings had closed 115 stores as of midday Monday, and was monitoring the storm to see where to send generators for stores in case power went out, said a spokesman, Tom Aiello. Among Sears shoppers, tools and generators were popular items, while at the company’s Kmart unit, blankets, food and water were selling well, Mr. Aiello said.
Lowe’s had closed 51 stores by midday Monday. In the Northeast, products in demand ranged from extension cords to utility pumps and snow shovels, a company spokeswoman, Stacey C. Lentz, said.
A day or two of lost sales is painful for stores in the holiday season, although many retailers and analysts expected consumers to put off holiday shopping until after the election.
Oliver Chen, an analyst for Citigroup, wrote in a research note that he estimated shopping could be down as much as 40 percent for the week in affected areas, and November comparable-store sales could be down by as much as 2 to 3 percent. However, he said, stores that sell emergency supplies, food and other staples should see an uptick in traffic and sales.
In the energy sector, the impact was also expected to be short term.
Inventories for heating oil, diesel and jet fuel in the Northeast were already low before the arrival of the storm, so there could be shortages of refined petroleum products in the wake of the hurricane.
There are five refineries in the storm path, with the Phillips 66 refinery in Linden, N.J., potentially the most at risk from flooding and storm surge, according to energy experts. The refinery, with 238,000 barrels of production capacity, was shut down as a precaution though it has never suffered a significant flood.
Most energy experts said that a gasoline price spike lasting more than a couple of days was unlikely because demand for gasoline is expected to decline significantly because of the storm.
“Every hurricane that lands on shore is a demand destroyer, but it’s the rare one that destroys supply,” said Tom Kloza, chief oil analyst at the Oil Price Information Service.
Economists do not foresee long-term impact from the storm, even if it results in billions of dollars in property damage from the high winds and lashing rain.
Powerful storms disrupt consumer spending and can cause sharp month-to-month swings in economic data, said Christopher D. Carroll, an economics professor at Johns Hopkins University, who has analyzed the impact of weather events for the Federal Reserve.
While it was hard to measure statistically, the effect of lost work hours was probably less today than in the past because of technology that allows people to work from home, he added.
Eventually, most spending or other activity is simply pushed forward, a phenomenon known in economics as intertemporal substitution. For example, because the New York Stock Exchange is closed on Monday and Tuesday, volume will probably rise on Wednesday and Thursday when trading will probably resume.
The most powerful hurricanes come along once or twice a decade — like Katrina or Andrew — and can actually increase economic activity.
“It’s a problematic aspect of how we account for economic output,” said Mr. Carroll. “Of course, it’s terrible when something is destroyed. That doesn’t show up in the calculation of gross domestic product. However, the rebuilt house does.”