Perryman: Heat Wave

Texas has thus far endured a heat wave of historic proportions in the summer of 2023. The higher-than-normal temperatures have created health issues for many residents and impacted quality of life for millions of people.

Texas has thus far endured a heat wave of historic proportions in the summer of 2023. The higher-than-normal temperatures have created health issues for many residents and impacted quality of life for millions of people. Not surprisingly, the effects do not stop there. 

As with any extreme weather event, excessive heat affects the economy in dynamic and complex ways. Substantial losses occur as a result of lower agricultural yields and an overall decline in productivity across multiple industries. Even morbidity and mortality increase. These losses are partially offset by gains in other sectors, such as increases in utility consumption. 

In order to provide a perspective on the economic impact of this summer’s heat wave as well as the potential consequences of a long-term trend toward hotter summers, our firm started with detailed baseline forecasts from our US Multi-Regional Econometric Model (which I developed over 40 years ago and have consistently updated, refined, and otherwise lived with since that time). We then merged in an extensive analysis of economic responses to temperature changes over several decades in all 50 states. This process allowed for detailed assessments over several hundred industries. Enough of that!

Assuming the current pattern generally persists through August, with average daily temperatures approximately 2.6 degrees above the long-term average in the state, the net loss to the Texas economy will be an estimated $9.55 billion in real gross product (a reduction in growth of about 0.47%). The greatest relative losses are found in agriculture (more than 5.7%); the largest absolute losses among major sectors include financial industries ($3.91 billion), due to losses such as crop insurance, and services ($2.11 billion), largely because of lethargic performance in professional and business services. 

Though dwarfed by overall patterns, some industries actually see gains during extreme heat, such as electric and water providers. The demand for some manufactured goods made in Texas also rises. The primary cause of losses is ultimately attributable to declines in productivity. The higher utility costs lead to some corresponding losses in consumer spending (retail sales is negatively affected by about $646 million).

Long-term impacts assuming average summer temperatures one degree above the historical average through 2050 were also estimated. In such a scenario, the effects compound over time, with losses to the Texas economy of almost $400 billion in real gross product in 2050 or about 9.24% below the baseline scenario. Once again, the effects vary greatly across various industries, with agricultural output suffering substantial and sustained declines. 

Extreme weather events such as heat waves cost the economy billions. Over a long period of time, persistent temperature increases will have even larger and more profound economic consequences. This stuff matters! In the meantime, stay safe (and cool)!


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