Will Hurricane Irene Be a Black Swan for the U.S. Economy?

The U.S. economy is growing very slowly, just 0.4 percent in the first quarter, 1.3 percent in the second. And it might not do a whole better the rest of the year. That’s a problem. A recent study from the Federal Reserve finds that that since 1947, when two-quarter annualized real GDP growth falls below 2 percent, recession follows within a year 48 percent of the time. (And when year-over-year real GDP growth falls below 2 percent, recession follows within a year 70 percent of the time.

So while we may be in a recovery, it’s a fragile one, at best. In short, nothing can go wrong or we’ll end up back in recession. That’s a big reason everyone is so focused on Europe and its ongoing sovereign debt and banking troubles. And why problems at Bank of America cause flashbacks of 2008.

But what about the nasty storm making its way up the East Coast? What’s the potential it causes enough economic damage and disruption to nudge the American economy back into a downturn? Well, I suppose the worst-case scenario would be a direct strike on New York City. That would be pretty bad:

In the city, a hurricane’s storm surge would cause sudden, extensive flooding, submerging much of Lower Manhattan and crippling the subway system and tunnels.

The powerful winds would uproot thousands of trees, down power lines and send debris flying in all corners of the city. And those winds could shatter windows on skyscrapers, especially in the taller buildings that would bear the brunt of powerful gusts that occur at higher elevations. The canyons of Manhattan could magnify the winds, and would be a deadly place for anyone caught beneath the raining glass.

Other comparisons to Hurricane Katrina are hard to ignore. Katrina, the most costly natural disaster in U.S. history, caused insured losses of more than $40 billion in 2005. AIR Worldwide, a firm that models disaster scenarios for insurance companies, has said that a repeat of the Long Island Express would cost $33 billion if it happened today. In the most dire projections, a direct hit on New York City could cost upwards of $100 billion.

The impact would be felt long after flood waters recede. Coch predicts that the salt water in the subway would corrode the switches and cripple the system for months or years, and disable much of the communications infrastructure in Lower Manhattan. “In 1893, Wall Street was cut off from the rest of the country when the telegraph lines went down,” he said. “Imagine what would happen now when the fiber optic cable failed.”

Sounds a lot worse than Hurricane Katrina given the incredible importance of Manhattan to the U.S. and global economy. Tough to quantify, of course. But, for comparison purposes, here is a Congressional Research Service analysis of the economic impact of Katrina in 2005:

Read the rest here.