You have probably noticed that it has been rather hot lately! A June heat wave affected millions of people from Texas and New Mexico to Florida to the northeastern United States. An area of high pressure over the Midwest pushed warm air to the surface and trapped it there, forming a heat dome. The result was a long period of record temperatures and little precipitation. Records were tied or broken across the country, from Boston and New York to Fort Lauderdale. In addition to the negative quality of life and health effects, excessive heat involves substantial overall economic costs. We recently estimated the net losses associated with the recent heat conditions, as well as the potential long-term effects of sustained hotter temperatures.
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 in the face of record heat. However, these losses are partially offset by gains in other sectors, such as increases in utility consumption for cooling. The demand for some types of manufactured goods also rises.
To estimate the effects, baseline forecasts from our US Multi-Regional Econometric Model were merged with an extensive analysis of economic responses to average temperature changes over several decades in all 50 states. This process allowed for detailed modeling of a comprehensive set of several hundred industries.
During the past 12 months, the temperature in the world has been about 2.39 degrees above the twentieth-century global standard (with records being established for each month). If that pattern continues through the remainder of the year, the US economy will lose an estimated $110.2 billion in real gross domestic product (GDP, measured in 2017 dollars) and 663,000 jobs compared to projections under normal weather conditions. These losses represent a 0.48% reduction in output and 0.40% lower employment compared to baseline expectations. (For additional detail, including results by industry, see our brief at www.perrymangroup. com.)
Over time, the negative economic effects of hotter sustained temperatures would compound and escalate notably, reaching up to $1.1 trillion in annual real GDP and more than five million jobs by 2050 if annual temperatures are just one degree on average above historical norms. Such a scenario would lead to US real gross product about 2.65% below the baseline scenario, with employment about 2.10% lower.
Heat waves and other events cause economic disruptions and inhibit growth. Although the effects vary greatly across industries, any observed gains in some sectors are far outweighed by losses in others. Over time, negative effects compound, leading to even more damage to the economy. Stay safe (and cool)!
Dr. M. Ray Perryman is President and Chief Executive Officer of The Perryman Group (www.perrymangroup. com), which has served the needs of over 3,000 clients over the past four decades.
M. RAY PERRYMAN THE ECONOMIST
