Hurricane Sandy's financial impact

November 01, 2012

| MoneyRates.com Senior Financial Analyst, CFA

The storm has passed, but now the clean-up must begin. That means that Hurricane Sandy has moved from being a physical danger to an economic threat.

Hurricane Sandy may have an unusually large impact on the national economy, because it managed to hit a large section of the population, key transportation infrastructure, oil refineries and a major global financial center. Sorting all of this out will take months, but here are five key questions to be asked about how this disaster might affect consumers at large.

1. Will the storm's damage slow the economy?

There's always an argument to be made both ways about the economic impact of a natural disaster. The damage to businesses and infrastructure will impede some economic activity, while the clean-up effort will spur other types of activity, such as building and construction. The precedent of Hurricane Irene last year isn't very instructive. Irene hit in the third quarter of last year, and the economy did slow in the third quarter of 2011. But that storm was hardly the only economic event during a quarter that also included the debt-ceiling crisis.

The economy then bounced back with a strong fourth quarter of 2011. But in 2012, Sandy arrived about two months later in the year than Irene, bringing the added economic threat that the clean-up could interfere with the holiday shopping season.

2. Will scarcity spark inflation?

The storm damage will restrict capacity for some goods, disrupt transportation and create a surge in demand for rebuilding materials. Given that inflation has already been troublesome in recent months, it would not be surprising to see Sandy give inflation another push.

3. Will savings accounts and other deposits be affected?

The potential for a slowing economy and rising inflation is a worst-of-both-worlds scenario for savings accounts. A soft economy means interest rates could stay low, even as inflation erodes the value of savings accounts.

4. Will mortgage rates jump amid rebuilding?

Revived inflation and increased demand for financing to pay for repairs could both force mortgage rates higher. It's an important reminder that at such unnaturally low levels, current mortgage rates are extremely vulnerable to unexpected economic shocks. Besides the potential for higher rates, a sudden surge in financing demand could swamp lending capacity, making mortgages harder to get.

5. Will credit card conditions suffer?

Credit card rates may be doubly vulnerable to potential hikes due to the aftermath of the storm. Families dealing with work disruptions and/or property losses could be stretched financially, leading to credit concerns that could mean higher interest rates. Meanwhile, if inflation rises, credit card companies could be inclined to raise interest rates to protect their profit margins.

Because of its potential economic disruption, Hurricane Sandy could affect Americans well beyond the path of the storm. Still, those who merely feel a financial pinch will still no doubt save their sympathies for those touched by the storm's immense physical destruction.

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