Industry Market Trends

How Hard Did Hurricane Sandy Hit Manufacturers?

Nov 06, 2012

Last week, Hurricane Sandy ravaged the East Coast of the United States. Although experts are still assessing the full extent of the storm's damage, initial estimates suggest the economic impact has been severe, not only in terms of direct harm, but also shuttered businesses and halted production. What are the true costs of the hurricane, and what can industrial companies do to mitigate the potential harm from Mother Nature?

Hurricane Sandy touched down on the East Coast last week, paralyzing the transportation network, shuttering countless businesses, closing financial markets and leaving millions of Americans without electricity. With roughly 10 percent of United States economic capacity located in the densely populated Northeast, the storm's severe negative impact is likely to be felt for a long time to come.

While it's difficult to gauge the precise amount of damage caused by the storm, early estimates indicate that the harm done to infrastructure and the disruptions to business activity were significant. Total economic losses are projected to be between $30 billion and $50 billion, or up to 0.6 percentage points off annualized fourth-quarter real GDP growth, according to IHS Global Insight.

In terms of infrastructure, loss estimates currently stand at $10 billion of insured damage and about $20 billion in total damage. Moreover, the disruptions to business activity are likely to be as severe - or even costlier - than the physical damage resulting from the storm.

"Sandy looks likely to cause major disruptions to business activity, because it hit the East Coast on a Monday (versus on a Sunday for [Hurricane] Irene in 2011). The commercial shutdown of the East Coast is likely to result in gross domestic product losses that may outweigh infrastructure damages," IHS Global Insight explains. "And, while some of these losses will be offset by ex-ante 'preparation' sales, as well as clean-up, repair and reconstruction activity - thus lessening the 'observable' GDP growth impact in the fourth quarter - part of the loss in economic activity is permanent (for example, spending at restaurants)."

The region most heavily affected by Hurricane Sandy stretches across 15 states with a combined gross regional product of around $3 trillion. If IHS's initial estimates are accurate, that would mean a loss of approximately 1 to 1.7 percent of gross regional product on the East Coast.

Other experts provide an even grimmer outlook. Economists from Mississippi State University projected an immediate economic loss of $20 billion in property damage and $60 billion in total losses when considering lost work time, lost tax revenue on wages, loss of spending effect and loss of commerce during business closures.

Manufacturing firms represent a sizable portion of the overall number of businesses that were forced to close due to the storm. An estimated 10,000 separate manufacturing facilities were directly affected by Hurricane Sandy, and each will face a long checklist of measures to clear before returning to full productivity.

For example, industrial companies will need to focus on having power restored, repairing structural damage to their facilities, draining flood water, clearing roadways, bringing phone and Internet services back online, testing and repairing equipment and removing debris.

"Unfortunately, due to little or no financial backing, many smaller local manufacturers may have to face the reality that their company may not recover for weeks, months, or even not at all. In a long-term sense, we will all see in the upcoming future the true impact of Hurricane Sandy when those decisions must take place," Energy Curtailment Specialist warns. "When thinking in terms of the industrial supply chain of the country, there will be a great decrease in productivity across the country...Distributors and storage facilities away from the damage will need to react as well. Retailers may very well raise their prices (even if for the short term) to cover the extra transportation costs to and from operational distribution centers."

Secondary and tertiary costs resulting from temporary closures or idling production capabilities are also likely to be a significant concern to businesses in a wide range of industries, as well as the general population.

"In addition to infrastructure damage, Sandy has forced the idling of about 70 percent of the East Coast's oil refineries. This does not bode well for the supply of refined oil products, since capacity was already quite tight prior to the shutdowns," IHS notes. "We are likely to see an accumulation of crude supply and a shortage of refined products in the coming days, which will inevitably put upward pressure on gasoline prices."

How can manufacturers, especially smaller firms, prepare for a disaster like Hurricane Sandy and find ways to mitigate the risks associated with them? The U.S. Small Business Administration provides a helpful list of tips for hurricane preparedness:

  • Identify your greatest potential risks. Look at the building where you do business - inside and out - and assess the risks. If you do this early enough, you'll have time to do structural upgrades - like impact-resistant doors and windows - that can prevent possible future storm damage.
  • Calculate the cost of business disruptions. What will the cost be for closing for a week, a month or six months? Once you've done that, you'll be able investigate insurance options or build a cash reserve that will allow your company to function during the post-disaster recovery phase.
  • Review your insurance coverage. Contact your agent to find out if your policy is adequate for your needs. Consult with a business insurance expert to advise you on the right coverage for your situation. When buying insurance, ask "How much can I afford to lose?"
  • Implement a crisis communications plan. This will enable you to make sure your employees, customers, vendors and contractors know what's going on. Also, establish an e-mail alert system, and make sure you have the primary and secondary e-mail addresses for your employees and everyone you do business with.
  • Consider a Telework Policy. Prepare for the possibility that employees won't be able to get to the workplace by developing an emergency remote-work or work-from-home policy.