Rosie On Sandy: One Economist's Realistic Hurricane Post-Mortem
-> "the surprise for Q4? A negative GDP print."
From David Rosenberg of Gluskin Sheff
MISSING THE BOAT
As I read and digest the reports estimating the damage from the devastating storm. I sense that there are far too many economists out there who are relying too heavily on past major hurricanes as they draw their conclusions from the current experience with Sandy.
I am concerned that as is the case so often, complacency has set in. The consensus view of a mere decimal place impact on Q4 real GDP growth from the storm seems like a pipe dream to me and has not been carefully thought out, in my opinion. Of course the devastation to the capital stock across so many dimensions affects net worth and not GDP, which measures the flow of spending in the economy, but it is indeed the spending portion that has also been seriously impaired, and a good part of it is not coming back and the inevitable pickup in spending of generators. sump pumps, cement and plywood is not going to be enough to provide an offset, at least over the next few months. Logic should prevail more than history here, because there is no appropriate historical comparison, and yes, I include Katrina in that assessment.
Yes, there will at some point be a revival in building activity and repair damage that will support spending and real GDP growth to be sure. But something tells me that this process may be delayed somewhat as the claims get tallied up and the fallout from the disaster continues. That should help out first quarter activity but from a lower level and, of course, assuming that the economy doesn't fall off any fiscal cliff.
The problem is two-fold. One is magnitude. The other is the demographic involved. With regards to magnitude, we are talking about 60 million people being affected, not three, or four or five million spread across corn and cotton fields in the south. There has not been such devastation affecting so many participants in the U.S. economy before. Were talking about New York. New Jersey, Connecticut and Philadelphia here ? not Waco. When such masses do not go to the office, they then don't do what they usually do. which is buy their coffee at Starbucks. They don't line up for pizza and sushi. That spending is not coming back. They are eating at home, and pulling out the box of macaroni and the can of tuna fish they bought three months ago. Then there are movies, sundries and even vacations that are not coming back any time soon into the spending sphere. And the cabs that drive people or the sales people at the clothing store that rings up your hill that have been out of work for the past few days aren't making the money they need to buy burgers and shakes and whatever else. So the ripple effect or what economists call the multiplier also has to be taken into consideration here.
And a few days in a quarter when expressed at an annual rate is actually a much bigger deal than a few decimals on a GDP growth figure. The consensus, I think, is in for a big surprise. And keep in mind that the downtrend in mortgage apps, the general weakness in the regional manufacturing surveys, the stalling-out in the improving trend in jobless claims and the fact that chain store sales in October were already running below plan, reveals an economic backdrop that lacked momentum even before the storm took hold.
The other factor I mentioned was the demographic. We don't know how many Starbucks or Coaches there are in Waco or Galveston, but there are 255 in New York City Its not just size. It's also tastes. We are talking about the storm hitting the most free-spending consumers in America. And that is also because these are the states with the highest per capita incomes ? the major states of the Northeast have on average household spending power that is 40% higher than in the deep south where storms and floods have historically been prevalent (again rendering comparisons with the past nearly totally useless when it comes to estimating near-term GDP impact). These are the same northern dilettantes who the Confederates wanted to secede from nearly 150 years ago and these high-income/high wealth folks love to shop ? not only do they have the means compared to their southern brethren, but their marginal spending propensities are huge and, as such, the impact on GDP from this perspective cannot he over- exaggerated, especially the likely depressing effect on luxury goods and services.
Of course, there is this other little problem that in many cases, basic insurance coverage is not covered for floods. So either Uncle Sam ponies up here or all the economists hinging their forecasts on a boom in building activity may end up being frustrated by the length of time it takes to get started. In the meantime, the spare room in the basement at cousin Jack's place is going to be just fine (and Jack's 30-year old boomerang kids just got kicked to the recreation room) and his wife's meat loaf is going to replace the traditional one night a week out at Il Mulino.
And don't forget one other factor that I did not mention ? which is the timing. Normally these major weather shocks happen in August or September. We are already in November and on the precipice of the most important time of the year for the retailing sector, which has already staffed up in anticipation of good tidings this year. This prognosis may have to be revisited because the temptation to shop at Tiffany's may be just a little bit tempered by the repair bill to your principal residence and it is also highly doubtful that cousin Jack is going to buy a tree for his family to put in the living room and one for yours in the basement.
So the surprise for Q4? A negative GDP print. The next question is whether there will be a Q1 rebound. Remember, as I mentioned yesterday, three of the major four ingredients to the NBER (National Bureau of Economic Research) recession all peaked in tandem in July. And it would be a slam-dunk four if the service sector had already followed goods-producing payrolls on the road to perdition.