Hurricane Harvey, which deluged Houston with days of torrential rain and flooding, is expected to be one of the costliest disasters in postwar U.S. history, and a likely drag on third-quarter economic growth by a full percentage point, Goldman Sachs said Saturday.
Costs from the storm, which hammered Texas last month, will eclipse those associated with 2012's Hurricane Sandy, the bank's analysts wrote in a research note. Using a model that examined the 35 largest hurricanes to strike the U.S. in the aftermath of World War II, Goldman found that major natural disasters correlated closely with a "temporary slowdown" in key economic gauges.
"Modeling these effects, we estimate that hurricane-related disruptions could reduce 3Q GDP growth by as much as 1 percentage point," Goldman's analysts wrote, adding that the main impact would be felt in consumer spending, business inventories, housing and the energy sectors.
Accordingly, the bank forecast a "meaningful drag" on growth indicators for the next two months, which could extend to a short-lived drag on September payrolls ranging from 20,000 to 100,000 jobs. Because of a jump in gas prices, Goldman also expects short-term price pressure that will add 0.2 percentage points to annual headline inflation.
Even as Hurricane Irma bears down on Florida, Harvey's full financial impact is still being assessed. Research from Fundstrat last week suggested uninsured losses could easily top $200 billion, while Accuweather estimated Harvey's toll could exceed $190 billion — more than Katrina and Sandy combined.
"Given potentially sizeable growth effects from Harvey — and with Irma risks now moving to center stage — we are lowering our Q3 GDP tracking estimate by 0.8pp to +2.0 percent," Goldman wrote. "However, we expect this weakness to reverse over the subsequent three quarters, more than recouping the lost output."
The boost from recovery and consumer spending helps to produce "sharper subsequent rebounds" after major natural disasters.
"We find that major natural disasters are associated with a temporary slowdown in most major growth indicators," said Goldman's analysts. "We also find that costly and broad-based natural disasters are associated with particularly large declines in economic activity, but also sharper subsequent rebounds."