2012 Third Quarter GDP and Hurricane Sandy

by Tim Shoji, Chief Economic Analyst

 

According to last week’s release from the Bureau of Economic Analysis, real GDP increased at an annual rate of 2.0% in the third quarter.  This is a slight increase from the annual growth rate of the last quarter, 1.3%, but not enough of an increase for the news to have any noticeable effect on the market.  Nevertheless, in this state of the global economy where China faces a possible hard landing and the Sovereign Debt Crisis continues in Europe, any positive news—however small—is good news. 

As the East Coast braces itself for the impact of Hurricane Sandy, there will undoubtedly be pundits who will claim that the destruction caused by the storm and the ensuing rebuilding effort will jump start economic activity, thus boosting the GDP.  While this may be true, it will be incorrect to infer that such economic activity will contribute to wealth creation.  As the Broken Window Fallacy illustrates, society does not become more prosperous through destruction.  In other words, resources spent replacing blown rooftops and broken windows are also resources that can’t be spent on other capital investments.  In order to have true sustainable growth, we need to look toward innovation and not senseless destruction. 

So beware of snake oil salesman that touts the economic benefit of natural disasters!