Econintersect: There are many factors which play into how areas recover after natural disasters. A NY Fed study details the issues and provides some historical data to show potential outcomes from Hurricane Sandy’s devastation.
The Path of Economic Recovery from Superstorm Sandy
Jaison R. Abel, Jason Bram, Richard Deitz, and James OrrSuperstorm Sandy caused damage and disruption to a wide swath of the New York-New Jersey region. The high winds and storm surge resulted in significant physical damage to residential property, commercial real estate, and the power and transportation infrastructure. Everyday activities such as commuting, shopping, and traveling were impeded or in some cases prevented. As a number of communities across the region continue to cope with the damage and ongoing disruptions, there’s concern about if and when activity will return to normal.
To address this issue, this post looks at regional employment patterns following four past disasters—Hurricanes Andrew and Katrina, the 9/11 attack on the World Trade Center, and the earthquake in Northridge, California—to gauge how the economic recovery from superstorm Sandy might play out. These past events generally suggest that any employment declines resulting from Sandy are likely to be reversed fairly quickly, and that a permanent loss of jobs in the region, while possible, isn’t likely.
Each of these disasters has some features in common with Sandy. Hurricane Andrew made a direct hit on the city of Homestead, Florida, in Miami-Dade County in August 1992. High winds destroyed about 26,000 homes in the county, displacing almost 160,000 residents. Homestead Air Force Base, a key employer in the area, was heavily damaged and nonoperational for almost two years. Hurricane Katrina came ashore close to New Orleans as a Category 3 hurricane in September 2005, and was the most costly disaster in U.S. history. The storm surge overwhelmed the system of levees and flooded about 80 percent of the city, destroyed more than 200,000 homes, and displaced almost 750,000 residents—many to areas outside the region and the state. The earthquake in Northridge, California, which occurred on January 17, 1994, heavily damaged portions of major roads and freeways that served hundreds of thousands of daily commuters, as well as destroyed residential property. The 9/11 attack on the World Trade Center damaged or destroyed almost 30 million square-feet of office space and caused major disruptions to the urban transportation infrastructure in Lower Manhattan. Regrettably, as with superstorm Sandy, lives were lost in all four disasters.
To assess the path of recovery on the heels of these disasters, we analyze monthly employment counts in the broad geographic area encompassing each event to track the dynamics of impact and recovery. The chart below plots an index of employment in the New Orleans metropolitan area (seven parishes), Los Angeles and Miami-Dade Counties, and New York City. The index is set to 100 at the month prior to the disaster, and traces the change in employment from twelve months before the occurrence to sixty months after.
Initial Impacts
The disruptions to economic activity are clearly most severe immediately after each disaster. In each of the four events, the negative effects on employment appear largely concentrated in the first two months after the disaster. Even so, employment effects were negligible following Hurricane Andrew and the Northridge earthquake: Miami saw just a one-month pause in its path of job growth and Los Angeles saw no dip at all. In contrast, employment effects were much more severe following the 9/11 attack and especially Hurricane Katrina. In New York City, a downturn in employment was already under way in early 2001 and, at the time of the attack, jobs had fallen by 30,000 from their cyclical peak. Between August and October 2001, another 120,000 jobs were lost before leveling off, for a cumulative decline of roughly 4 percent; we estimate that about two-thirds of that decline—in effect, the portion that occurred in October 2001—is attributable to the attack. This trend paled compared with the 30 percent decline in employment, or about 180,000 jobs, in the New Orleans metro area in September and October 2005.
Recovery
A rebound of employment from a disaster generally gets under way quickly. The recovery process varies by disaster, but typically is driven by activity to clean up and restore the site of the disaster and repair or rebuild the damaged infrastructure. Federal funds, the resilience of the public and private sectors in the affected areas, and policy decisions made in the days and weeks following the disaster all combine to influence the strength and rapidity of the recovery. The recovery in Miami and Los Angeles got under way fast. Miami, where overall employment had been expanding modestly for about nine months prior to the hurricane in August 1992, saw double-digit increases in construction jobs over their year-ago levels starting in September 1992 and continuing through most of 1993. A similar trend was observed in Los Angeles County, where construction jobs accelerated sharply the month following the earthquake and remained strong for almost two years after. The quick start of the recovery process likely offset much of the disaster-related job losses in the immediate aftermath of these disasters.
In New York City, the impact of 9/11 on jobs was confounded by ongoing recession-related reductions in employment. Our earlier study of job trends in the city following 9/11 tried to take account of both sources of weakness, and our estimates show that within a year after the attack jobs there were roughly at the level they would’ve been had the attack not occurred. It took almost five years for the city to regain the level of employment in place at the time of the attack, but that recovery was actually quicker than ones in either of its two prior downturns. The clean-up and restoration of the attack site proceeded fairly quickly, but the rebuilding of the destroyed office space in the two World Trade Center towers didn’t commence for a number of years. In New Orleans, employment turned around sharply after Katrina, but there were a lot of lost jobs to recover. Construction jobs in the area, which had fallen by one-third in September 2005, began to expand in October, and by December they were already above their year-ago levels; construction employment remained high for the next fourteen months. In other industries, though—such as finance, and leisure and hospitality—employment remained well short of pre-Katrina levels.
Longer-Term Effects
One concern with disasters is whether they reduce the long-term growth potential of an area. Of these four disasters, only New Orleans failed to regain the jobs it had lost. The scale of Hurricane Katrina, particularly the mass destruction of homes and the large outmigration, was unprecedented. The economy had also been stagnant for eighteen months prior to the hurricane, and actually had seen little job growth since the late 1990s. The confluence of a weak economy, massive physical destruction, and a dispersion of a large share of the population combined to prevent New Orleans from fully recovering to its pre-Katrina level of employment.
Implications for the New York-New Jersey Region
Superstorm Sandy disrupted a number of industries in the region. In our survey of manufacturing firms in New York State, which was undertaken more than a week after the storm, all firms in the New York City area indicated some reduction in activity, with 90 percent reporting they were shut down for at least one day and 40 percent for five days or more. And new claims for unemployment insurance rose sharply in both New York and New Jersey during the second full week following the storm. These adverse effects were concentrated in November. Going forward, the net effects on employment will depend on whether these disruptions are severe enough to offset the restoration and rebuilding now under way. Pockets in the region that bore the brunt of the storm surge will face great challenges to fully recover, but prior disasters suggest that the New York-New Jersey region as a whole will rebound in the months ahead.
Over the longer term, trends associated with past disasters suggest that the region is unlikely to experience any significant permanent reduction in employment. As we discuss in our previous post, some activity that was lost as a result of the storm is likely to be restored, and the post-storm rebuilding activity will provide a further offset. However, while aggregate employment may be affected minimally in the long run, many individuals and businesses have indeed experienced a permanent loss. Disclaimer
The views expressed in this post are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.Jaison R. Abel is a senior economist in the New York Fed’s Research and Statistics Group.
Jason Bram is a senior economist in the Research and Statistics Group.
Richard Deitz is an assistant vice president in the Group.
James Orr is an assistant vice president in the Group.
How Will We Pay For Superstorm Sandy?
Jaison R. Abel, Jason Bram, Richard Deitz, and James Orr
While the full extent of the harm caused by superstorm Sandy is still unknown, it’s clear that the region sustained significant damage and disruption, particularly along the coastal areas of New York, New Jersey, and Connecticut. As we describe earlier in this series, the economic costs associated with natural disasters are generally thought to arise from the damage and destruction of physical assets and the loss of economic activity. These costs can be substantial, running into the tens of billions, and impose significant stress on the affected communities. In this post, we assess who will ultimately pay the economic costs imposed by the storm. Based on data from recent hurricane events, it is likely that the federal government and private insurance companies will more than cover the aggregate costs. In the short run, though, there may be strains on state and local governments as well as on individuals and businesses as they await reimbursement.
It’s useful to group the parties that will ultimately bear the economic costs of Sandy into five categories: private insurance companies, the federal government, state and local governments, charities such as the American Red Cross, and the individuals and businesses in the communities directly impacted. The chart below, which is based on data from a recent study, provides a rough estimate of how the economic costs have been shared during major U.S. hurricane events from 1989 to 2004, just before Hurricane Katrina struck the Gulf region. During this period, private insurance companies paid about 57 percent of the cost on average. Federal disaster relief—primarily funds distributed through the Federal Emergency Management Agency (FEMA)—accounted for another 26 percent, although this figure is likely low as it doesn’t include funds provided by the National Flood Insurance Program. Estimates based on typical government cost-sharing arrangements that exist for natural disasters put the state and local government share at about 6 percent of the overall cost. Charities tend to contribute a couple percent. Finally, individuals and businesses affected by a major hurricane during this period covered about 10 percent of the cost.
The story changes significantly following Katrina. As the next chart shows, the share paid by insurance companies held steady, while the share paid by federal disaster relief increased substantially, from about 25 percent before Katrina to nearly 70 percent after. Some of this increase reflects more generous federal reimbursement to state and local governments, in part for projects to help mitigate the effects of future storms. The Stafford Act, a 1988 law designed to guide the process of relief following a natural disaster, stipulates that the federal government reimburse a minimum of 75 percent of state and local government costs. In hurricanes prior to Katrina, the rate was generally between 75 and 90 percent. However, beginning with Katrina, state and local governments often received 100 percent reimbursement. With this expansion of federal disaster assistance, payments from private insurance companies and the federal government exceeded the total economic cost of events since Katrina by about 25 percent. This pattern suggests that an excess amount was distributed to state and local governments and affected individuals and businesses, although it’s not clear in what proportion. Clearly, though, some businesses or individuals may not have been fully reimbursed for their out-of-pocket expenses, despite the excess payments in aggregate.
Even with private insurance companies and the federal government ultimately picking up some or all of the costs associated with events like these, state and local governments in the affected areas typically fund a significant amount of the relief effort up front. Brookhaven, New York, for example, was still receiving funds from the federal government a year after Hurricane Irene struck in 2011. Delays can create immediate fiscal strain on state and local governments, especially small municipalities, because they typically must balance their budgets annually. Such stresses have already emerged in the hardest-hit areas of the region. Municipalities can respond to these fiscal pressures by borrowing money to help cover immediate costs—either directly from banks or by floating bonds—or they may choose to temporarily raise taxes. Individuals and businesses may also face their own set of financial challenges as they await reimbursement.
If history is a guide, the tri-state region should receive a considerable amount of help in paying for Sandy, particularly from the federal government. New York State and New Jersey have asked for full reimbursement of the costs of the storm, plus funds for preventing and mitigating the effects of future events, with the requested amounts totaling $42 billion and $37 billion, respectively. The promise of reimbursement may only be faintly reassuring to those already beginning to pay for Sandy, and these payments, of course, will not cover the welfare costs associated with the suffering the storm caused. Going forward, the large and increasing role of the federal government raises a number of important public policy questions about who should bear the risk and financial burden of natural disasters. In the meantime, the availability of these resources will be instrumental in helping the region rebuild and recover from Sandy’s damage.
Disclaimer
The views expressed in this post are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.
Jaison R. Abel is a senior economist in the New York Fed’s Research and Statistics Group.
Jason Bram is a senior economist in the Research and Statistics Group.
Richard Deitz is an assistant vice president in the Group.
James Orr is an assistant vice president in the Group.
