Pundits are trying to predict the impact of Hurricane Sandy on politics, economics etc. We have been curious about the impact on non-farm payrolls this Friday, and weekly jobless claims this Thursday. the BEA has now announced that they may have to delay the results.
RBC Capital is out with an extremely interesting report on Hurricane Sandy. In short, it shows that not only are predictions wrong, (underestimated or overestimated), but sometimes the exact opposite of what analysts predict occurs. Therefore, all these forecasts for Hurricane Sandy are likely wrong. Value investors will not be surprised, but the data is still quite fascinating. Below is a summary of their points.
1) It typically takes a storm on the scale of hurricane Katrina to move the needle in terms of economic data, no one knows if Hurricane Sandy will be as strong.
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2) There is the question of rebuilding, which most think of as a boon for GDP. The problem is that while rebuilding efforts in aggregate can easily become a significant percentage of GDP, the impact is generally spread out over multiple quarters or even years, thereby diminishing the economic impact in the short-term.
In a nutshell, while the fundamental data from the 2005 period was considerably impacted by the 2005 storms (Katrina/Rita/Wilma), the 2004 season (Charley/Ivan/Frances/Jeanne) had a very subdued effect on the numbers – despite several major hurricanes that year. The 2005 events elicited a pop in jobless claims, sharp drop in consumer confidence and a notable decline in industrial production. Compared to the prevailing three-month trend at the time, claims were 46K higher, consumer confidence was 19 points lower (Michigan and Conference Board averages) and industrial production slowed 1.1%. By comparison, the 2004 season saw no such deviation. In fact, claims and production actually improved.
There were similar discrepancies on the inflation front as well. Headline consumer prices jumped 1.4% m/m on the back of the 2005 storms – or 0.9 percentage points above the three-month trend. The increase was driven by a 5.3% m/m surge in the household energy component, as natural gas facilities were severely disrupted. Moreover, gasoline pump prices ticked up nearly 70 cents per gallon – or the equivalent of roughly a $7 billion hit to consumer pocketbooks for the month. The 2004 experience was less than noteworthy. During that period, headline CPI did not deviate from the recent trend and household energy was actually 0.7ppt BELOW trend. Gasoline prices rose a mere 10 cents in the face of the four major hurricanes. In summary, we would need to see a Katrina-like event to set off a chain reaction of worsening employment, weaker confidence, slower production, and higher inflation before Hurricane Sandy has any short term impact on the economy.
The chart below shows the data, from the time period: