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Storm Stimulus Unlikely As Communities Recover

A fallen tree crushes a truck in Falls Church, Va., outside Washington. Storms across the Midwest and East downed trees and power lines and left millions without power.
Alex Wong
Getty Images
A fallen tree crushes a truck in Falls Church, Va., outside Washington. Storms across the Midwest and East downed trees and power lines and left millions without power.

Once major storms pass, hard-hit communities sometimes discover an unexpected silver lining: a miniature economic boom, as insurance checks pay for homeowners to rebuild and businesses to restock.

Unfortunately, residents of the 650-mile long swath of the Midwest and Atlantic Seaboard raked by Friday's storms (or derecho) aren't likely to see a similar benefit. The reason lies in the nature of the storms, and the damage and inconvenience they left in their wake.

It's conventional wisdom in the insurance business that major disasters are followed by frenetic rebuilding that can bolster the local economy. Insurance money flows in, first to pay living expenses for homeowners ousted by storm damage, and ultimately to pay for repairs, new homes, new inventory for businesses, and so on.

It's hard to isolate recovery spending and employment from the many other economic influences, and ultimately, much of the activity after a storm amounts to replacing what's lost rather than the kind of real economic gains that are most desirable for a community. But unemployment data, at least, seem to support the idea of an uptick after the storm.

The best known example is Hurricane Andrew, which devastated much of southern Florida in 1992 and led to more than $25 billion of insurance payouts in the state ($41 billion in 2012 dollars). In Miami-Dade County, unemployment spiked at first, to over 10 percent — a recession had already pushed it nearly that high before the storm — and then fell to about 8 percent, roughly where it was just before the recession. The effect was even more pronounced in nearby Broward County. (Figures are from a recent presentation by Miami-Dade's chief economist, Robert Cruz: PDF.) By contrast, overall U.S. unemployment inched down to 7.3 percent from 7.6 percent over the same three-month period.

More recently, the deadly tornados that struck Joplin, Mo., last year caused about $2 billion of insured damage. Since then, unemployment has fallen faster than in the U.S. overall, to 6.2% in May, a year after the storm hit, from 7.2% the month before the storm. U.S. unemployment fell from 9 percent in April 2011 to 8.2 percent in May 2012. A similar pattern occurred in Tuscaloosa, Ala., which was hard-hit by tornados in April 2011.

So why wouldn't the most recent storms yield similar recovery benefits? For one thing, the actual physical damage was more limited: There was little tornado activity, not much hail, and the storms moved quickly over a huge territory, without lingering like the worst hurricanes tend to.

The result: Lots of people without power, and some relatively minor damage, but not the acres of destroyed buildings seen after tornados and major hurricanes. Most business and home insurance policies don't pay out for losing electricity, especially if there's no wind damage or other physical harm to the building.

Although formal industry estimates aren't yet available, economist Robert Hartwig, president of the Insurance Information Institute trade group, says the storms may have done damage in the hundreds of millions of dollars. That's significant for the homeowners and businesses that get insurance payments, but spread over the storms' long trail, it isn't likely to provide much in the way of economic stimulus.

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Theo Francis