View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

August 2018, EB18-08

Economic Brief
The Impact of Higher Temperatures
on Economic Growth
By Riccardo Colacito, Bridget Hoffmann, Toan Phan, and Tim Sablik

What happens to the economy when it gets hot outside? Despite longstanding assumptions that economic damage from rising global temperatures would be limited to the agricultural sector or developing economies,
this Economic Brief presents evidence that higher summer temperatures
hurt a variety of business sectors in the United States.
June 2018 was the third-warmest on average
across the contiguous forty-eight states since
record keeping began in 1895, according to the
National Oceanic and Atmospheric Administration (NOAA). Only 1933 and 2016 saw hotter
starts to the summer.
Climate scientists project that average global
temperatures will rise over the coming decades,
which could have a variety of environmental
impacts. But what impact would higher temperatures have on the economy? To date, studies of
this question have largely focused on developing countries, under the assumption that those
countries are more exposed to the effects of
higher temperatures. The economy in developing countries is often more reliant on agriculture
or other outdoor activities, and those countries
have fewer resources to devote to mitigating the
effects of heat through technologies such as air
conditioning. Indeed, researchers have found
that higher temperatures have significant negative effects on the economic growth of developing nations.1
In the case of developed countries, such as the
United States, researchers have focused largely

EB18-08 - Federal Reserve Bank of Richmond

on measuring the impact of warming on outdoor
economic activities, such as agriculture.2 Since
these sectors make up a relatively small share of
the U.S. economy, it has generally been assumed
that the economic effects of global warming
for the United States would be relatively small.
As Nobel prize winning economist Thomas
Schelling observed in a 1992 article, “Today very
little of our gross domestic product is produced
outdoors, susceptible to climate.”3
However, research by three authors of this Economic Brief (Colacito, Hoffmann, and Phan) finds
that the consequences of higher temperatures
on the U.S. economy may be more widespread
than previously thought. By examining changes
in temperature by season and across states, they
find evidence that rising temperatures could
reduce overall growth of U.S. economic output
by as much as one-third by 2100.4
Warming across Seasons and across States
Attempting to measure the relationship between
temperature and growth by looking at the whole
United States can hide important variations.
Some parts of the country have higher average
temperatures. Further increasing temperatures in

Page 1

those areas may be more harmful than rising temperatures in parts of the country that are generally
cooler. In fact, higher temperatures in colder regions
or during colder seasons actually may have positive
effects on economic activity because extreme cold
can be as much an impediment to certain activities
as extreme heat.
Highlighting the importance of these seasonal and
regional variations, Colacito, Hoffmann, and Phan
find no statistically significant relationship between
temperature and economic growth when looking across the whole United States. But measuring
the impact of temperature in different seasons and
across individual states yields different results. The
authors take the average of daily weather observations from NOAA for each season for 1957–2012.
They define each season as a quarter of the calendar
year: January through March is winter, April through
June is spring, July through September is summer,
and October through December is fall. This definition aligns the temperature data with the quarterly
periods used for economic data.
Colacito, Hoffmann, and Phan find that temperature increases in the summer are associated with
a decline in gross state product (GSP), which is the
value added in production by the labor and capital
of all industries in a given state. On average, each 1˚F
increase in the mean summer temperature reduces
the annual GSP growth rate by 0.154 percentage
points. A reduction in the growth rate, as opposed to
the level of economic output, has important implications for the impact of temperature changes in the
long run. Changes to the growth rate compound
over time and, as a result, are more lasting.
As theory would suggest, Colacito, Hoffmann, and
Phan also find that higher temperatures during the
colder fall months have a positive effect on growth.
On average, each 1˚F increase in the mean fall temperature increases the annual GSP growth rate by
0.102 percentage points. This finding is smaller and
less statistically robust than their finding for the summer effect, but it may help explain why temperature
changes do not appear to have a significant effect
on growth when averaged across the whole year and

across the whole country: the effects in the summer
and fall partly offset. The authors do not find any
significant effects for temperature increases in the
spring or winter.
Measuring the impact of temperature changes on
states as opposed to the country as a whole also reveals significant variations. Colacito, Hoffmann, and
Phan divide the country into four regions — North,
South, Midwest, and West — using classifications
from the U.S. Census Bureau. Average temperatures
are highest in the South, and the authors find that
the economies of southern states are the most
sensitive to changes in summer and fall temperatures. Further investigation shows that this effect is
not driven by a larger role of agriculture in southern
states. In fact, the authors find that the economic effects of temperature are widespread across a variety
of industries.
Rising Temperatures Hurt Many Industries
One might easily presume that higher temperatures
would only affect agriculture. But in fact, studies
have documented the effects of extreme temperatures on other industries. For example, temperatures
above 90˚F have been found to reduce production
at automobile manufacturing plants in the United
States.5 Another study published by the Chicago Fed
found that severe winter weather has a significant,
albeit short-lived and generally small, negative effect
on a variety of industries.6 In line with these findings, Colacito, Hoffmann, and Phan find that higher
temperatures in the summer have a negative effect
on labor productivity generally, while higher fall
temperatures have a positive impact.
Losses in labor productivity have the potential to
impact a wide range of industries, which is exactly
what Colacito, Hoffmann, and Phan find. (Figure 1 on
the following page shows results for 1998–2012.) The
two largest sectors of the U.S. economy — services
and FIRE (finance, insurance, and real estate) — make
up half of national GDP and are both hurt by higher
summer temperatures. More housing transactions
take place in the spring and summer, perhaps because house shopping involves travel and outdoor
activity. As temperatures rise, potential homebuyers

Page 2

may tend to stay inside, which could help explain the
finding that higher summer temperatures negatively
impact the real estate sector.7

As expected, the authors also find that higher summer temperatures have a large negative effect on
agriculture, forestry, and fishing. Although this sector
accounts for only about 1 percent of national GDP,
losses in this area may spill over to other sectors of
the economy, such as retail food services. Higher
summer temperatures do have a positive effect on
some industries, including utilities and mining, benefits that may stem from increased energy consumption during hotter days.

Studies also have documented that high temperatures negatively affect health, resulting in increased
hospitalizations.8 Colacito, Hoffmann, and Phan
hypothesize that this connection may explain the
finding that higher summer temperatures have
a substantial impact on the insurance sector. As
health outcomes worsen, insurers would face increased claims. Overall, the authors find that a 1˚F
increase in temperature is associated with a 1.30
percentage point decline in output growth for the
insurance sector.

Looking Ahead
Although the effects estimated by Colacito, Hoffmann,
and Phan are robust, they are also small in the short
term. Over a longer horizon, however, the impact


All Industries = –0.256













Percentage Point Change in Industry Output Times Industry Share

Figure 1: Summer Temperature Effects on Annual GDP Growth Rates (1998–2012) in the Cross-Section of Industries

Source: Colacito, Hoffmann, and Phan (2018)
Notes: For each industry, the horizontal red line represents an estimate of the impact of a 1oF increase in average summer temperature
on the annual growth rate of the industry’s GDP times the industry’s share of GDP. The bottom and top portions of each box represent
the 90 percent confidence intervals of each estimated coefficient, while the outer limits of each boxplot represent the 95 percent
confidence intervals. Red boxes contain negative values, green boxes contain positive values, and gray boxes contain both positive and
negative values. Standard errors are clustered at the year level. “All Industries” is the sum of all the industry coefficients multiplied by
their corresponding industry shares.
* FIRE stands for the U.S. Bureau of Economic Analysis classification of “Finance, Insurance, and Real Estate.”
** The “Agriculture” sector includes forestry and fishing.

Page 3

on GDP growth rates may be substantial. The authors study the effects of rising temperatures in the
future using projections for average temperatures
in the United States over the years 2070–99.9 These
estimates use three different scenarios of future
greenhouse gas emissions (high, medium, and low)
by the Intergovernmental Panel on Climate Change.
The authors apply these estimates to their analysis,
assuming that states do not make any changes to
adapt to or mitigate the effects of higher temperatures and that the effects of temperature on economic growth that they found in their state-by-state
analysis do not change.

While the impact of future climate adaptations is
unknown, Colacito, Hoffmann, and Phan do examine whether more widespread climate adaptation
within their sample period may have reduced the
impact of temperature on growth. In fact, they find
that the negative impact of higher summer temperatures is larger and still statistically significant after
1990, while the positive fall effect becomes smaller
and statistically indistinguishable from zero. Thus, if
anything, they find that the negative impact of temperature increases on GDP growth has become more
pronounced in recent decades despite advances in
adaptive measures.

Under the low-emissions scenario, the authors estimate that rising temperatures would reduce the
growth rate of GDP by 0.2 to 0.4 percentage points
from 2070 through 2099, or as much as 10 percent
of the historical average annual growth rate of 4
percent. Under the high-emissions scenario, rising
temperatures could reduce the growth rate by up to
1.2 percentage point, or roughly one-third of the historical average annual GDP growth rate. (See Figure
2.) The authors note that these estimates should be
“interpreted with caution,” since future adaptations
to changing temperatures may mute the long-run
effects they calculate.

Overall, these findings suggest that rising temperatures in the future could hamper economic growth
in a variety of industries even in developed nations
such as the United States.
Riccardo Colacito is an associate professor of finance
and economics at the University of North Carolina,
Chapel Hill, and Bridget Hoffmann is an economist
in the Research Department at the Inter-American
Development Bank. Toan Phan is an economist and
Tim Sablik is an economics writer in the Research
Department at the Federal Reserve Bank of

Figure 2: Projected Reduction in Annual GDP Growth Rate (2070–99) under Three Emission Scenarios

Percentage Point Reduction





Source: Colacito, Hoffmann, and Phan (2018)
Notes: The bottom and top horizontal lines denote the minimum and maximum projected impact. Each box contains
50 percent of the distribution of projected impacts, while the horizontal line inside each box indicates the median
projected impact.

Page 4


J ohn Luke Gallup, Jeffrey D. Sachs, and Andrew D. Mellinger,
“Geography and Economic Development,” International Regional Science Review, August 1999, vol. 22, no. 2, pp. 179–232;
William D. Nordhaus, “Geography and Macroeconomics: New
Data and New Findings,” Proceedings of the National Academy
of Sciences of the United States of America, March 2006, vol. 103,
no. 10, pp. 3510–3517; Melissa Dell, Benjamin F. Jones, and Benjamin A. Olken, “Temperature Shocks and Economic Growth:
Evidence from the Last Half Century,” American Economic Journal: Macroeconomics, July 2012, vol. 4, no. 3, pp. 66–95.


See, for example, Marshall Burke and Kyle Emerick, “Adaptation
to Climate Change: Evidence from U.S. Agriculture,” American
Economic Journal: Economic Policy, August 2016, vol. 8, no. 3,
pp. 106–140.


Thomas C. Schelling, “Some Economics of Global Warming,”
American Economic Review, March 1992, vol. 82, no. 1, pp. 1–14.


Riccardo Colacito, Bridget Hoffmann, and Toan Phan, “Temperature and Growth: A Panel Analysis of the United States,”
Federal Reserve Bank of Richmond Working Paper No. 18-09,
March 2018.


 erard P. Cachon, Santiago Gallino, and Marcelo Olivares,
“Severe Weather and Automobile Assembly Productivity,”
Columbia Business School Research Paper No. 12/37,
December 2012.


J ustin Bloesch and François Gourio, “The Effect of Winter
Weather on U.S. Economic Activity,” Federal Reserve Bank of
Chicago Economic Perspectives, First Quarter 2015, vol. 39,
no. 1, pp. 1–20.


L . Rachel Ngai and Silvana Tenreyro, “Hot and Cold Seasons in
the Housing Market,” American Economic Review, December
2014, vol. 104, no. 12, pp. 3991– 4026.


S ee, for example, Ekta Choudhary and Ambarish Vaidyanathan,
“Heat Stress Illness Hospitalizations — Environmental Public
Health Tracking Program, 20 States, 2001–2010,” Morbidity and
Mortality Weekly Report, Surveillance Summaries, December 12,
2014, vol. 63, no. 13.


T emperature estimates come from Evan H. Girvetz, Chris
Zganjar, George T. Raber, Edwin P. Maurer, Peter Kareiva,
and Joshua J. Lawler, “Applied Climate-Change Analysis:
The Climate Wizard Tool,” PLoS One, December 2009, vol. 4,
no. 12, e8320.

This article may be photocopied or reprinted in its
entirety. Please credit the authors, source, and the
Federal Reserve Bank of Richmond and include the
italicized statement below.
Views expressed in this article are those of the authors
and not necessarily those of the Federal Reserve Bank
of Richmond or the Federal Reserve System.

Richmond Baltimore Charlotte

Page 5