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After wrath of Hurricane Sandy, tens of billions in rebuilding

These are stories Report on Business is following Monday, Oct. 29, 2012.

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Storm hits economy
The rebuilding effort in the United States in the wake of Hurricane Sandy will run into the tens of billions.

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Economists expect the huge storm to hit the U.S. economy, though it's obviously far too early to gauge the impact. Observers, however, are already trying to calculate the amount that could be spent on construction, which itself could provide a boost down the road.

Professor Peter Morici of the University of Maryland's Robert H. Smith School of Business has some interesting calculations today, noting that the end result is much more difficult than just looking at what's covered by insurance and what's not.

"Disasters can give the ailing construction sector a boost, and unleash smart reinvestment that actually improves stricken areas and the lives of those that survive intact," he said.

"Ultimately, Americans, as they always seem to do, will emerge stronger in the wake of disaster and rebuild better - making a brighter future in the face of tragedy."

Hurricane Sandy, the professor added, appears likely to destroy more property than Hurricane Irene's hit of $15-billion (U.S.) to $20-billion. Add to that about two lost business days that would affect 25 per cent of the U.S. economy.

"It seems likely that Sandy will impose greater destruction of property, and add to that the loss of about two days commercial activity, spread over a week across 25 per cent of the economy, an initial estimate of the economic losses imposed by Sandy is about $35- to $45-billion, he said.

"However, rebuilding after Sandy, especially in an economy with high unemployment and underused resources in the construction industry, will unleash at least $15-$20-billion in new direct private spending--likely more as many folks rebuild larger than before, and the capital stock that emerges will prove more economically useful and productive."

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As an example, he cited a restaurant owner with "inadequate patronage" who may use the insurance money for a "more attractive business." Or, situations where homes that may be smaller and older, but on big plots of land, are replaced by bigger units that can do better business in a tourist season.

"The Outer Banks of North Carolina saw such gains several decades ago after rebuilding from a storm of similar scale," he noted.

So count on $15-billion to $20-billion in new direct private spending on rebuilding, and take into account those will build bigger and better than before.

"Factoring in the multiplier effect of $15-20-billion spent rebuilding yields an economic benefit from reconstruction of about $27-36-billion," said Prof. Morici.

"Add to that the gains from a more modern and productive capital stock - likely in the range of $10-billion - and consumer and business spending that is only delayed but not permanently lost - likely in the range of $12-billion - and the total effects of natural disasters of the scale of Sandy are not as devastating two years down the road."

For now, the hurricane is wreaking havoc as businesses from airlines to manufacturers are hit. Almost 7,000 flights in the United States have been cancelled over the past two days, for example, Bloomberg News reports.

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"Depending on the precise damage and severity (yet to be determined, of course), it will likely be akin to the effect of a major snowstorm – delaying some activity in a significant portion of the U.S., and cancelling some activity," deputy chief economist Douglas Porter said today.

"Major storms can have a macro impact, and will likely cut into some October indicators (especially since it's hitting so late in the month and can't be recouped)."

The timing, of course, is key, and the storm could affect manufacturing and retail sales data in particular, noted senior analyst Michael Hewson of CMC Markets in London.

"In an economy that is struggling to maintain traction in the wake of concerns about the fiscal cliff and events in Europe, the impact on output is likely to weigh on the recent recovery in economic data seen in the past few weeks," Mr. Hewson said.

The exact hit is a "guessing game" until economists know the length of time of power outages and other disruptions after Sandy, said chief economist Avery Shenfeld of CIBC World markets, though, like others, he projected an impact on retail sales.

Indeed, there will be "winners and losers" among various sectors, added deputy chief economist Derek Burleton of Toronto-Dominion Bank, though the net impact in such situations tends to be "quite modest," a blip over a couple of quarters.

"Sandy has the potential to hit about one-third of the U.S. population, so its reach could be massive," Mr. Burleton said.

"As the event takes place, cancelled flights, disruptions to other transportation, power systems and other infrastructure will clearly weigh on business sector productivity," he added.

"But as businesses reopen after the storm departs, much of this lost activity will be recouped. In addition, any rebuilding to repair the damage will further mitigate the losses. A good part of the rebuilding burden would fall on insurance companies."

It's a mixed picture for retailers. Many are likely already suffering slower sales, Mr. Burleton said, particularly in the malls, while convenience stores and those in the home sector are likely seeing a pick-up.

Similarly, fast-food outlets are probably doing a brisk business, while sit-down restaurants take a hit.

There is the outlook to consider, too.

"Given the timing of this storm, spending patterns heading into the key holiday season might be affected," said Mr. Burleton. "To the extent that households need to target spending at storm-related impacts and cleaning up, they might spend less on holiday areas and gifts."

Analysts are also tracking the oil market and the threat to energy.

"As with Hurricane Irene, which struck the eastern seaboard in August 2011, the risks for oil markets are multi-pronged," said analysts at JPMorgan Chase & Co.

"Flooding, power outages, and issues with once-through cooling water systems could cause unplanned interruptions to refinery production," they said in a report.

"In the baseline scenario, these disruptions are likely to be short-lived, but they may prove longer than expected. The risk of extended outages due to flooding, as occurred following Hurricanes Katrina and Rita, will be forefront in mind."

Petronas extends bid
Shares of Progress Energy Resources Corp. jumped today as Malaysia's Petronas extended its takeover bid, saying it plans to still try to win Canadian approval for the deal.

"Petronas Canada and Progress have met with officials of Industry Canada to under the basis for the Oct. 19, 2012, announcement by the minister of industry," the companies said in a statement, referring to the rejection of the offer on the basis that it didn't meet Canada's "net benefit" test.

"As noted in the release by the minister, Petronas Canada has up to 30 days from the date of the announcement to make any additional representations and submit further undertakings. Petronas Canada intends to make further submissions to the minister in order to obtain approval of the proposed transactions."

Pearson, Bertelsmann strike deal
Pearson PLC and Bertelsmann today unveiled a massive merger in a book publishing industry that has already been consolidating.

The two companies struck a deal to marry Penguin and Random House, which they said would merge the world's "leading English language publishers."

Random House is the biggest in the United States and Britain, the companies said, while, of course, Penguin is known the world over and, they added, has "a strong presence" in emerging markets.

When the deal is done, creating a concern known as Penguin Random House, Bertelsmann will hold 53 per cent of the merged publisher, and Pearson 47 per cent.

"The two companies believe that the combination will create a highly successful new organization, both creatively and commercially, with the breadth and investment capacity to deliver significant benefits," the companies said.

"Readers will have access to a wider and more diverse range of frontlist and backlist content in multiple print and digital formats. Authors will gain a greater depth and breadth of service, from traditional frontlist publishing to innovative self-publishing, on a global basis."

The deal, which the companies was expected to close in the second half of next year, must pass muster with competition watchdogs.

What to watch for this week
The highlights come on Friday when governments in both Canada and the United States release their widely watched jobs reports. In the U.S., in particular, this one will fall under more scrutiny, given that it's the last one before the November presidential election.

Economists expect the U.S. report to show that about 120,000 jobs were created in October, with the unemployment rate inching up to 7.9 per cent.

"Released just four days before the Nov. 6 election, October's employment report will command more than its normal already-heightened attention," said senior economist Michael Gregory of BMO Nesbitt Burns.

"The political reaction to the prior report, and its hefty 0.3 percentage-point drop in the jobless rate, ran from rousing rounds of 'Happy Days Are Here Again' to vitriolic accusations of data manipulation," he said in a report Friday.

"That the unemployment rate fell to 7.8 per cent, its lowest level since January, 2009, (when President Obama was inaugurated), was not lost on anyone. What did get lost was that report's main message: U.S. businesses aren't hiring to a great degree."

While jobs were created, the unemployment rate likely ticked up as more people went looking for work.

In Canada, Friday's report isn't expected to be anywhere near as rosy as the one last month, which showed 52,000 jobs created in September. Economists have various projections on this one, from jobs lost to jobs gained.

"A clear indication that the job market is not as hale and hearty as the recent employment gains would suggest is the fact that the unemployment rate has drifted higher in recent months from a cycle low of 7.2 per cent to 7.4 per cent in September," said Mr. Gregory's colleague at BMO, Mr. Porter.

"In complete contrast to the U.S. experience, the participation rate, at 66.8 per cent, is only 1 percentage point below its all-time high (whereas the U.S. rate of 63.6 per cent is down nearly 3 percentage points from pre-recession levels)."

For investors, quarterly earnings continue to roll out, with several major companies reporting, including Honda Motor Co., BP PLC, Deutsche Bank AG, Fiat SpA, Ford Motor Co., Talisman Energy Inc., Thomson Reuters Corp., TransCanada Corp., UBS AG, General Motors Co., Maple Leaf Foods Inc., MasterCard Inc., Suncor Energy Inc., Visa Inc., Barrick Gold Corp., BCE Inc., Exxon Mobil Corp., Royal Dutch Shell PLC, Husky Energy Inc., Imperial Oil Ltd., Starbucks Corp., Chevron Corp. and SNC-Lavalin Group Inc.

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