Just one week of hot weather could have a negative impact on the economy.
Extreme heat is known to have negative impacts on various aspects of human
Temperature Fluctuations and Economic Conditions: Evidence from Weekly US Data | NBER
https://www.nber.org/papers/w35529
New study shows how a single hot week causes a delayed economic slump
https://www.scienceofmoney.org/a-weekly-view-of-heat-and-the-economy-reveals-a-slow-burn-hit-to-us-labor-marke-1032/
When economists consider the relationship between temperature and the economy, they generally focus on long-term data, such as annual or quarterly data. However, averaging economic activity over several months or years can obscure short-term fluctuations and potentially hide the subtle impacts of heat.
Therefore, research teams from institutions such as the University of Miami and the University of Notre Dame conducted an analysis using weekly temperature datasets for each US state based on records from the National Oceanic and Atmospheric Administration (NOAA) and a weekly state-level Economic Conditions Index (ECI) dataset developed in 2024.
The Economic Correlation Scale (ECI) measures the state-by-state economic situation by combining approximately 21 indicators, including unemployment insurance claims, employment, gross domestic product (GDP) , gasoline retail prices, mobility, and credit card payments. It is adjusted so that 'zero' corresponds to the long-term growth rate of the United States as a whole. In other words, by looking at the ECI, you can see how well or poorly the state's economy was compared to the United States as a whole.
The study analyzed data for the continental United States from April 1987 to June 2024. Because several economically impactful events occurred during this period, including the Lehman Brothers collapse and the COVID-19 pandemic, the analysis was adjusted to account for these shocks.
To track the economic repercussions of temperature changes, the research team used a method called panel local projection, which estimates the impact of shocks at various points in the future from a given point in time, rather than assuming a fixed model of how events will unfold. The forecast included a period from a specific week to 104 weeks later (2 years later), examining the impact of high temperatures in a given week on the economic situation.
Analysis of the data revealed that when the average temperature for a given week is high, a three-stage change occurs: 'the economic situation improves gradually for the first six weeks or so,' 'the cumulative economic impact turns negative after about 10 weeks,' and 'the situation continues to worsen until it bottoms out and stabilizes after 80 to 90 weeks.'
According to the research team, the initial short-term improvement in economic conditions was modest, with a medium-term deterioration being the dominant characteristic. Since the Economic Coefficient of Investment (ECI) is measured against the long-term growth rate of the United States, this result means that if a state experiences a prolonged period of hot weather, its economic growth rate will fall below its predicted growth trajectory for more than a year.
Furthermore, when examining whether the effects of the same 1°C temperature increase differed between colder and warmer states, it was found that for the first year after the shock, all states followed roughly similar trends. However, beyond that, while warmer states continued to experience economic deterioration, cooler or average-temperature states saw their economies stabilize more quickly and began to show signs of recovery. In other words, a 1°C increase in the weekly average temperature in warmer Florida had a greater long-term economic impact than a similar temperature change in colder North Dakota.
Furthermore, a seasonal investigation into the impact of temperature changes on the economy revealed that while summer temperature increases resulted in a slightly greater medium-term economic downturn than winter temperatures, the difference was minimal. This finding suggests that it's not just the summer heat that's the problem, but that rising temperatures throughout the year negatively affect the economy.
Since the ECI can be broken down into six categories—labor market, mobility, real economic activity, economic expectations, finance, and households—the research team performed a similar analysis for each category. They found that the labor market's response accurately reflects the overall pattern of the economic downturn and accounts for the majority of the medium-term economic deterioration.
The research team also focused on three labor indicators: the total monthly non-farm payrolls, the average monthly weekly hours worked by manufacturing production workers, and the weekly number of new unemployment insurance claims. They found that there was little change initially when the average weekly temperature rose, but after a few months, it began to decline and remained sluggish in the medium term. The total number of employees stabilized after a slight decrease, but unemployment insurance claims steadily increased from around 30 weeks later.
Regarding the mechanism by which weekly temperature increases persist for more than a year, the research team proposes a model in which 'rising temperatures increase worker fatigue, leading to a decrease in productivity per hour,' 'this decrease in productivity slowly accumulates and transforms into long-term economic pressure,' and 'the damage from rising temperatures is gradually offset by changes in work schedules and the introduction of air conditioning.' Simulations using a model incorporating these elements have been reported to show results that closely match the actual situation.
It should be noted that the ECI used in this study is a composite indicator and does not directly measure production volume, and that panel local projection estimates correlation rather than proving causality.
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