Could hurricane Irene help the economy? Rebuilding as stimulus.

Money spent to rebuild after hurricane Irene may slightly stimulate the economy, especially as a result of insurance payments. But most expenditures will merely be diverted from one area to another.

Hans Pennink/AP
Floodwater caused by tropical storm Irene rushes along Route 73 in St. Huberts, N.Y., Monday, tearing up the road as it flows.

After Hurricane Irene, will a rebuilding "stimulus" come next, or is the storm's financial legacy just another hit to beleaguered consumers, businesses, and local governments?

That's an important question, given the fragile status of the US economy.

Irene did less damage than many meteorologists feared, but it swept through the most densely populated region of a nation that many economists say is teetering not far from recession.

Economic forecasters generally say that what awaits is, at best, a very modest post-Irene stimulus.

In the coming months, construction jobs should be more available in states along the Eastern Seaboard, working on everything from flood-damaged bridges to soggy wallboard and wiring in homes. But when consumers spend more to remove a downed tree or to replace some basement furniture, they have less to spend on other things.

"I don't think it's going to provide a tremendous boost," says economist Ryan Sweet of Moody's Analytics, a forecasting firm in West Chester, Pa.

Still, citing past history of recovery from natural disasters, he predicts at least some economic bounce later this year, as insurance payments and other repair money is spent.

Irene "may shave off a tenth [of a percentage point] from third quarter GDP, at most, and we'll get that back and more in the fourth quarter," Mr. Sweet predicts.

Another forecasting firm, IHS Global Insight, is skeptical about any discernible stimulus.

"We are not at present making any changes to our growth forecasts purely as a consequence of Irene," says a report by Global Insight economists. "[Some] reconstruction may take place at the expense of costs pared elsewhere, or simply may not be done at all."

Whoever is right, the two views aren't necessarily that far apart. Both agree that the economy was already in a rough patch before Irene hit, and neither sees a huge impact from the storm.

What Irene does is to change the composition of spending in the economy, and its timing. More will now be spent on construction, home goods, and services like tree removal. And given the lean bank accounts for both households and governments, that probably means less spending on some other things.

Kinetic Analysis, a distaster forecasting firm, argued over the weekend that the storm's impact could play out differently from some similar events in the past, because the economy is so soft. Many small businesses and homeowners can't easily can't handle a shock to their budget, and banks may not be as quick to extend credit to cover repairs.

The underlying weakness in the economy was confirmed Tuesday, as a widely watched index of consumer confidence plummeted in August to its lowest level in more than two years. The index, tracked by the Conference Board in New York, fell to 44.5, down from 59.2 in July. (The index can be above 100 in good times.)

Global Insight gives an initial estimate of Irene's total damage of $5 billion to $15 billion, which translates into about 0.03 percent to 0.1 percent of gross domestic product (GDP).

If all the damage gets repaired fairly soon (an uncertainty, since much of it is uninsured), those dollar figures would represent the magnitude of a potential boost to the economy later this year and in 2012.

Costs for rebuilding infrastructure such as roads and bridges will hit state and local governments that have been struggling to balance budgets since the recession. Federal disaster assistance is likely to cover a good bit of that cost, Sweet says.

Fiscal hawks in Congress, including Rep. Eric Cantor (R) of Virginia, have said that any boost in federal spending due to the storm should be offset by other spending cuts.

One uncertainty, says Sweet at Moody's Analytics, is whether post-Irene rebuilding alters the consumer and business confidence. A revival in construction jobs might bolster incomes along the East Coast, and thus buoy consumer spending, he says.

But for people who have to dip into savings to pay for damage, the storm isn't a confidence lifter. And some areas along the coast that were near recession before the storm, such as Atlantic City, N.J., will now have to see if tourist business recovers in the months ahead.

You've read  of  free articles. Subscribe to continue.