-Storm Not Seeing Having Much Effect on Monetary Policy

By Steven K. Beckner

(MNI) – It might seem counterintuitive, but Hurricane Sandy may end
up being a net plus for the U.S. economy, economists said Tuesday after
the massive storm had slammed New York City and other areas of the
Eastern seaboard.

Abstracting from the obvious loss of life and human pain,
economists anticipated that the storm’s initial hit to income and
spending should give way to a surge of economic activity as damaged
areas rebuild.

“It’s a perverse stimulative,” Mesrow FInancial Chief
Economist Diane Swonk observed.

The storm is not likely to have any appreciable effect on monetary
policy, analysts said.

Meanwhile, even as the storm continued to ravage the Northeast and
affect transportation and other aspects of life as far west as the Great
Lakes, things were starting to get back to normal in the Big Apple.

Despite flooding in lower Manhattan, the New York Stock Exchange
announced that it would resume trading Wednesday after a rare two-day
hiatus. Bond trading is also expected to resume.

Estimates of the storm damage has ranged as high as $20 billion.
But Sung Won Sohn, an economics professor at California State
University, said the net economic impact of the storm has to be assessed
from two standpoints: the direct economic cost from actual damage
and prospective reconstruction activity.

“When you put the two together, (Sandy) could actually add to
economic growth due to construction activity,” said Sohn. “Personal
income obviously dropped initially, but once reconstruction begins, it
will pick up again.”

Sohn said the storm likely will “create more volatility in economic
activity,” but not a decline in the rate of growth of gross domestic
product.

In fact, he said, the storm’s impact “could be positive in
the long-run.” He estimated that, over the coming year, the
storm likely will add a tenth or two-tenths of a percent to GDP growth.

Swonk said the destruction of homes and other property will drain
wealth over the long-term, but she said “the spurt of economic
activity” that will take place as cities and towns rush to rebuild
“will more than compensate” for those losses.

Swonk predicted that, as homeowners rebuild with insurance money,
they will take the opportunity to renovate and expand their homes.

There will also be large-scale purchases of televisions and other
electronics ruined by the storm, she noted. And there will be other
ancillary benefits, such as the increased overtime pay restaurant
workers will earn as they serve rescue workers.

Swonk emphasized that “the timing matters” in terms of how fast
electricity can be restored.

Wells-Fargo chief economist John Sylvia expects Sandy to be “a
modest plus for GDP in the fourth quarter.”

Sylvia said the storm will “redirect consumer spending” and “will
boost residential spending and some commercial building.”

“It’s the classic story of wealth lost but GDP gain,” said Sylvia.

As for the impact on the Fed, in past storms and other catastrophic
events, the Fed has injected emergency liquidity into the financial
system.

But Sohn observed that “they don’t need to do that this time
because there’s already so much liquidity.”

Irrespective of the storm, Sohn said he expects the Fed’s
policymaking Federal Open Market Committee to either extend “Operation
Twist” beyond the end of the year or expand the size of its “QE3″ asset
purchase program.

Swonk said the storm will affect the Fed “only to the extent that
it creates near-term stimulus that wouldn’t exist otherwise.” She said
it could “take pressure off” the Fed to do more.

** MNI **

–email: sbeckner@mni-news.com

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