By Joseph Seneca, University Professor,
Nancy Mantell, Director, Rutgers
Economic Advisory Service
Michael Lahr, Associate Research Professor
& Will Irving, Research Associate,
Edward J. Bloustein School of Planning
and Public Policy, Rutgers University
Hurricane Sandy imposed enormous damage on New Jersey, harshly and significantly affecting the lives and livelihoods of millions of people. It was a deadly, dangerous, and highly destructive storm. The individual hardships and economic losses to people, businesses, and local and state governments were extensive and severe. These impacts will continue to affect the state for some time, even as significant rebuilding and restoration activity occurs.
Following the storm, a team of researchers at the Edward J. Bloustein School of Planning and Public Policy of Rutgers University made an early effort to assess the economic and fiscal impacts on New Jersey. This essay summarizes that study and describes subsequent storm-related developments that are likely to further affect the state’s economy.
Economic Effects The storm has caused economic losses in two areas. The first is the damage done to the stock of capital assets in the state. These assets include private capital such as residential housing and its contents, business structures, inventories, and utility infrastructure. Also damaged were public capital, including roads, water systems, bridges, parks and recreation areas. The owners of these assets may be compensated for these losses in time, but typically only partially, by payments from private insurance, FEMA, and special federal and state aid. Any uncompensated losses will be borne by private owners and the public sector. These constitute significant and real losses in asset values.
These damages to the capital stock reduce the flow of economic activity—jobs are lost, output is not produced, income is not earned and spent, sales are diminished, electric and gas service is not available, and individual and business taxes are not incurred and not paid. The losses occur for varying periods of time depending on the level and location of the disruptions and the number and type of households and businesses affected. These losses are subsequently measured in declines in standard economic data series such as employment, incomes, tax revenues, sales, and gross state product.
The second area of damage affects local governments. It results from the changes in property values, building codes, flood zone maps, and assessments as a result of the storm. The scale, timing, and type of rebuilding will also affect property values and the property tax base in complex ways in the affected municipalities.
Measuring the Losses As an example of the losses in
economic activity, Table 1 provides data on initial unemployment claims in New Jersey for the five weeks immediately after the storm. When compared with the four-week pre-storm average, initial claims were approximately 100,000 higher in the month following Hurricane Sandy. The lost income, spending, and output as a result of this unemployment had negative impacts throughout the state’s economy.
The Rutgers research team estimated that the state lost a full week’s output for two-thirds of state’s gross domestic product and that it took another two weeks to recover full output production. This loss totaled $11.66 billion in the fourth quarter of 2012. We also assumed that there will be a loss of $950 million in tourism economic activity in the third quarter of 2013 due to disruptions in the shore communities.
Using the Bloustein School’s R/ECON™ forecasting model, we estimated the negative impacts on the state’s economy of the losses in economic flows described above. The results appear in Table 2 and indicate that in the absence of offsetting rebuilding expenditures, state GDP is nearly $12 billion lower than a baseline forecast (with no storm) in the fourth quarter of 2012.
Employment would fall by 7,300 jobs, personal income would be lower by $1.2 billion, and state tax revenues would be reduced by $108.5 million. The negative impacts would persist for three years and the total losses would increase, although by smaller amounts each year.
However, this only accounts for the down side in the abstract absence of restoration spending. The rebuilding efforts will offset a significant amount of these losses.
Offsetting Economic Increases The significant expenditures on emergency response and then subsequent restoration and rebuilding spending by both the private and public sectors generates increases in economic activity. This spending creates jobs, incomes and tax revenues, and acts to offset the negative impacts on economic flows.
In our study, we used an estimate of the expenditures on rebuilding and restoration and analyzed the impacts. The study drew upon an estimate of the storm damages done by the Governor’s Office. We adjusted those estimates to reflect damages to the capital stock of approximately $25.4 billion and developed a time path of expenditures over a three year period.
The resulting net impacts on the economy of both
the storm and the offsetting restoration expenditures in the fourth quarter of 2012 are given in Table 3. When these expenditures are taken into account, the outlook
State GDP is $7.1 billion lower in the fourth quarter of 2012; significantly less than the nearly $12 billion loss without recovery spending. This lower loss is attributable to the positive impacts of the rebuilding expenditures. Net positive effects on GDP occur over the next three years as the offsetting gains from rebuilding expenditures outweigh any lingering negative impacts of the storm. Similar patterns emerge for employment, income, and state taxes.
Implications The scale and timing of these recovery
expenditures will play a key role in determining the
storms effects on New Jersey’s economy. When the original analysis was done, it was uncertain whether significant federal aid would be forthcoming. The subsequent approval of the aid was a major victory for the states affected. It is a vital component in allowing New Jersey’s economy to recover. To obtain the greatest economic boost, the state must spend its share of the federal restoration money well and effectively.
While the federal funds are highly important and necessary, the harsh impacts of the storm on people, on their homes, and their livelihoods are real and continuing for many New Jerseyans. Capital losses to homeowners, businesses, and the public infrastructure are not likely to be fully offset by compensation. This will result in losses in value to some owners and to the public sector.
Finally, the likelihood of future storms and other weather extreme events, increasing in frequency and intensity as global warming continues, requires wise public and private decisions to plan, adapt, and mitigate going forward. This will reduce the amount of future damages to life and property even as the state rebuilds and recovers.
For more information see Mantell et al., The Economic and Fiscal Impacts of Hurricane Sandy in New Jersey: A Macroeconomic Analysis, Rutgers Regional Report #34, January 2013, Rutgers University at http://policy.rutgers.edu/reports/rrr/RRR34jan13.pdf.
Originally published in New Jersey
Municipalities, Volume 90, Number 4, April 2013