El-Erian on Sandy’s Economic Impact

Just what impact will Hurricane Sandy end up having on the economy? PIMCO’s Mohamed El-Erian recently tackled that question in a piece for CNBC.com.

One of El-Erian’s key points was that the government likely won’t be able to play its usual role in the recovery, with more being required of the private sector. “In more normal times, we would look to federal, state and local governments to increase spending, particularly on reconstruction and rehabilitation of infrastructure,” he writes. “Indeed, government assistance to the uninsured and less well-off sectors — both personal and small business — has proven especially valuable in curtailing negative social and economic effects. But budgets are already under pressure. Meanwhile, the Federal Reserve has already floored policy rates, limiting its ability to assist unless it goes even more unconventional.” The result, he says, will be that the recovery will be less front-loaded and less comprehensive, and spread out over a longer period.

El-Erian also discusses how different sectors of the economy will be impacted. Some, like insurers and retailers, should take a hit. Others, like construction companies and infrastructure firms, should benefit.

With its hands somewhat tied at a terrible time because of budget constraints, will Congress finally be moved to get its act together and address the country’s fiscal problems? El-Erian isn’t optimistic. “If history is a guide, and notwithstanding the significant devastation created by Hurricane Sandy, there should be limited expectation that even this stark situation will prompt Congress to take concerted and meaningful action,” he writes, though he does think Americans will come together to address the crisis. “In the immediate term, American communities will rally their considerable resolve and resilience, and they will summon their culture of giving to help victims of the storm,” he says. “The challenge is also to facilitate the longer-term ability to harness fully resources of private and public sectors currently undermined by deep political divisions, thus removing what has been a constant dampener of entrepreneurship and value creation.”