What happens to the economy when it gets hot and stays hot?
That’s the question a group of economists at the Federal Reserve Bank of Dallas tried to answer, looking at Texas’s record-breaking heat this summer, which strained the state’s electrical grid.
“The impact of the sometimes relentless summer 2023 heat appears to have depressed the ability of some industries to supply goods and damped consumer demand, especially for certain services,” the group said in the slightly bloodless language of economists.
Looking at a broader range of summers, in this case from 2000 to 2022, the economists found that “for every 1-degree increase in average summer temperature, Texas annual nominal GDP growth slows 0.4 percentage points.”
When looking at this past summer, the economists figured that “with this year's summer temperatures 2.5 degrees above the post-2000 average, estimates for Texas suggest, all else equal, the summer heat could have reduced annual nominal GDP growth by 1 percentage point for 2023, or about $24 billion.”
All signs pointed to economic sluggishness due to high heat. Federal Reserve banks don’t just gather and analyze a huge amount of quantitative data — on, say, employment and wages — from the regions they cover and the economy as a whole, they also systematically collect qualitative data from businesses, i.e. asking the people who run them questions.
When the Dallas Fed surveyed businesses in its region in Texas, it found that a quarter of the respondents “reported lower revenue or lower production due to the heat,” especially in the leisure and hospitality sector, which could mean anything from fewer hotel stays to fewer trips out to eat.
It wasn’t just heat depressing consumer demand for these services, but also high heat leading to a less productive workforce, the Dallas Fed analysis showed.
And these effects don’t just show up in one record breaking summer. “Analysis on data since the mid-1960s indicates an increase in summer temperatures leads to slower output growth,” the researchers wrote. “The higher the average summer temperature, the greater the impact of additional temperature increases, likely due to more adverse effects on health and productivity.”
This effect was magnified by something that will be familiar to climate scientists: nonlinearity. It’s not just that every degree increase in average summer temperature leads to some decrease in economic output, but that the effect of higher-than-average summer temperatures on economic growth is greater in already hot states, like Texas, with similar effects in nearby states like Louisiana, Arkansas, and Oklahoma.
It's easy to think of an example. Say you’re in an area where the typical summer temperature is 75 degrees Fahrenheit. If it’s actually 80 degrees out one day, you may not be very discouraged to play golf or go to an amusement park. But if it’s typically 85 degrees out, temperatures rising to 90 may encourage you to stay home.
When it’s extremely hot, people also get sick and don’t show up to work, according to data cited by the Dallas Fed, which found that “hours worked decline significantly when daily maximum temperatures rise above 85 degrees.” And, more seriously, there’s a bump in mortality from extreme heat.
With Texas summers projected to only get hotter — the state’s climatologist wrote in a report that “the typical number of triple-digit days by 2036 is projected to be substantially larger, about 40% larger than typical values so far in the 21st Century” — a mild decrease in economic growth may be the least of its climate-related problems.
