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Sandy Deflates an Already Weak Economy

Rick Newman

Early estimates of the damage caused by Hurricane Sandy ranged from $15 billion to $20 billion, putting it on the same scale as Hurricane Irene, which hit the eastern seaboard in 2011.

[GALLERY: Superstorm Clean Up]

But economists now say the damage caused by Sandy could easily be twice those initial estimates, with forecasting firm IHS Global Insight estimating the final tally could range from $30 billion to $50 billion. Among other things, Sandy has wrecked billions of dollars worth of property and infrastructure, disrupted many businesses on the East Coast for at least two days, and forced the idling of about 70 percent of the oil refineries on the East Coast.

IHS estimates that the costs associated with Sandy could total somewhere between 1 percent and 1.7 percent of gross regional product for the dozen or so states affected, which would translate to about 0.3 percent of national GDP. That might not sound like much, but it comes at a time when the overall economy is growing at a scant 2 percent, a growth rate that could slow even further as Washington grapples with the "fiscal cliff" approaching at the end of the year.

[See why the New York Stock Exchange, shut down by Sandy, isn't as vital as you think.]

The huge rebuilding effort that will follow Sandy will be a boon for the still-struggling construction industry, but the press often mischaracterizes the buzz of activity following a natural disaster to be a net gain for the economy. ""The alleged benefit of natural disasters is a recurring error in the media," says economist Donald Boudreaux of George Mason University, author of Hypocrites and Half-Wits. "It can be good for some people, like those in the building trades, but when people have to rebuild a roof that was perfectly fine yesterday and is now destroyed, that's money people don't spend on other things."

Insurance will cover some of the damage from Sandy, but that's not the free fix many people assume it to be, since outsized insurance claims can lead to higher premiums in the future. Some business activity merely gets delayed during a weather event, but when people stay home instead of shopping or eating at restaurants, that's a permanent loss to the economy.

"The effect on growth for the fourth quarter will not be catastrophic," IHS said in a research note, "but might still be noticeable, especially in an economy with little momentum anyway."

While large, the economic toll from Sandy still won't match Hurricane Katrina, which devastated the southeast coast in 2005. That storm caused $120 billion in damage, which was nearly a full percentage point of GDP. Some of the damage still hasn't been repaired.

Rick Newman is the author of Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman

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