Weather Costs U.S. Economy $485 Billion a Year! And That Doesn’t Include Hurricanes

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The following article is an excerpt of the Browning Newsletter, a key source of information in describing the relationship between macro weather-related trends and their specific impacts upon various parts of the economy, world, and the financial markets. To subscribe to her montly newsletter, CLICK HERE.

A pioneering study funded by the US National Center for Atmospheric Research examines which portions of the economy and which states are the most vulnerable to normal weather changes. The results are surprising – did you know that mining is frequently more vulnerable to weather than agriculture? There’s more...

It is easy to ignore the impact of the weather when you work in an air conditioned office. Indeed, in Western societies, the more important a financial decision maker is, the less likely he or she is to be experiencing the climate. Refrigerated air and centralized heating shelter office workers from the gritty reality of heat waves and freezes.

Unfortunately these same luxuries are not sheltering the US economy. A recent study led by the National Center for Atmospheric Research (NCAR), found normal weather variation, excluding extreme events and disasters, cost the nation an average of $485 billion a year, 3.4% of the 2008 national economy. The study showed that finance, manufacturing, agriculture, and every other sector of the economy is sensitive to changes in temperature and precipitation. The impacts can be felt in every state.

I advise anyone who wants to examine these findings in detail to read Jeffrey K. Lazo, Megan Lawson, Peter H. Larsen, Don- ald M. Waldman, “U.S. Economic Sensitivity to Weather Variability”, Bulletin of the American Meteorological Society, June 2011. It can be found at: http://journals.ametsoc.org/doi/pdf/10.1175/2011BAMS2928.1.

I am summarizing the findings here, but the article contains more details and a great bibliography. In particular, if analysts want to find some similar studies for Europe, the article is a great starting point.

Methodology

The study is a pioneer study, the first to apply quantitative economic analysis to estimate the annual weather sensitivity of the entire U.S. economy. (Most previous studies have been focused on Europe, specific US economic sectors, or broad long-term studies on climate change.) As such, the authors expect further research and refinement on the subject. Probably the biggest addition will be to factor in the probability and effects of natural disasters and extreme weather to this study of normal weather impact.

The authors used a nonlinear regression analysis, a statistical technique for comparing multiple variables. They examined 70 years of weather records, from 1931 – 2000. In particular they focused on temperature (heating degree days and cooling degree days), total precipitation and deviations from average precipitation. They then divided the private economy into 11 sectors. They examined the sensitivity of these sectors to weather variability using 24 years of state-level economic data. (This is the period for which detailed state-level data were available and consistent for major economic sectors.)

In their analysis, the authors focused on the 48 contiguous states and excluded Alaska and Hawaii. (They explained these two states were outliers and represented only 0.6% of the total U.S. GDP.)

The results of this examination let the authors identify how sensitive the different states are to normal variations in the weather. At the same time they were able to rank sectors of the economy by their degree of sensitivity to changes in temperature and precipitation. Finally they calculated the total dollar impact of these changes on the U.S. economy.

The Results

The results showed the complex influence of weather. For example, a prolonged dry spell is terrible for crops but good for construction projects. A snowstorm might disrupt air travel and drive up heating costs but it usually boosts the attendance at ski resorts.

weathers economic impact by sector

One of the most important findings of the study was that weather affects the economy by affecting both supply and demand for products and services. This is important because most studies in the past focused primarily on the production (i.e., supply) side. However, as any businessman can tell you, demand is equally important. For example, one of my clients who sells ski equipment informed me long ago that if LA was balmy, his sales would plummet no matter how much snow was on the slopes.

ECONOMIC SECTORS – A primary finding of the study is that every economic sector has a statistically significant sensitivity to at least one measure of weather variability. Indeed, two sectors—wholesale trade and the finance/insurance/real estate sector (FIRE)—show sensitivity to all four measures of weather variability. Overall, precipitation variations had a larger affect on the economy than temperature.

The study showed that the three largest economic sectors, FIRE, manufacturing, and services, has $60 billion or more in weather sensitivity. Yet these sectors receive very little discussion compared to agriculture and energy. This tends to be a rather expensive blind spot for most economic analysis.

percent of economic sector affected by weather

The authors then examined the relative magnitude of weather impact on the eleven different sectors. Some sectors, such as communications, construction, retail trade, services, transportation, and wholesale trade are relatively immune,  with a  sensitivity of less than 5%. FIRE, manufacturing, and utilities were more vulnerable, with between 5% – 10% of their revenue sensitive to weather variation. As expected, agriculture, which has been the most-studied sector for weather impacts is one of the most relatively sensitive sectors at 12.1%.

Surprisingly, mining appears to be the most sensitive sector to weather variability at 14.4%. Probably this is because weather has such a major impact on the demand for oil, gas, and coal. However, the authors were intrigued by the results showing that the impact of precipitation variations was “uncharacteristically large compared with all of the other sectors.” It is an area that they intend to investigate further, although it may be somewhat related to the greater need for petrochemicals when dry weather interferes with hydroelectricity or Gulf storms affect production.

WEATHER AND STATES – The report also concluded that the economy of every state is sensitive to the weather. New York was most sensitive (a 13.5 percent impact on the gross state product) and Tennessee was least sensitive (2.5 percent). The state-level findings were more subject to error than national findings, but overall the authors noted that “A key point here is that when aggregated across all 11 sectors, no one part of the country appears significantly more weather sensitive than another region in relative terms.”

Click here for larger image
state sensitivity to weather
Source: http://journals.ametsoc.org/doi/pdf/10.1175/2011BAMS2928.1

It should be noted that this only refers to normal weather variation. Certain regions are more suceptable to extreme weather events – such as tropical storms in the Gulf and blizzards in the north.

THE NATION – The US as a whole is more resilient that the states, bad weather in one area is usually compensated with good weather in another. Economic production can shift from one region to another. When examining the 70 years between 1931 and 2000, every year saw weather related losses – 1969 seeing the most and 1939 seeing the least. Overall there was a 3.36% variability in the national income due to normal weather changes.

When the authors applied this to the 2008 national GDP, the study indicated that routine weather events such as rain and cooler-than-average days can add up to an annual economic impact of as much as $485 billion. And that is before you add any additional costs from heat waves, tropical storms, droughts or extreme blizzards!

Turn up the air conditioning. Losing that much money is enough to make anyone break into a sweat!

News Notes

As Americans sweat through the latest heat wave, it may be comforting to read that the Earth’s temperatures have declined over the past decade. Yes – according to a study by Robert Kaufmann, of Boston University, that was presented at US Proceedings of the National Academy of Science – the Earth’s temperature declined between 1998 and 2008 even though the atmospheric concentration of carbon dioxide increased steadily.

This is hardly a surprise. There are several factors that explain this statistical picture.

  • The year 1998 had the largest El Niño, a warming event in the tropical Pacific, in 400 years. It was extraordinarily hot. If you start measuring on a different year, global temperatures didn’t drop.
  • The sun has been less active.
  • The Pacific has cooled and the ending year of the measurement is a cold La Niña in the Pacific.
  • Additionally the Pacific is trending towards a mostly negative and cool Pacific Decadal Oscillation.
  • As Kaufman pointed out in his paper, China doubled coal consumption between 2003 and 2007. This surge in the use of coal-fired power stations may have helped cool the climate by pumping sulfur into the atmosphere. There have been other times in the past when the cooling from coal burning seemed to mask overall global warming.

Climate change is never steady and man produces both warming carbon emissions and cooling sulfur emissions. Oceans oscillate, solar energy fluctuates and only the debate seems to resist the tides of change.

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About Evelyn Browning Garriss

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