Heat hurts the economy

Rising temperatures could reduce U.S. economic growth by up to one-third over the next century, says Kenan-Flagler’s Ric Colacito.

Man stands behind desk.
Ric Colacito, a finance professor at the UNC Kenan-Flagler Business School, is researching how increasing temperatures could negatively impact the U.S. economy. (Alyssa LaFaro/UNC-Chapel Hill)

At the UNC Kenan-Flagler Business School, Ric Colacito is a finance professor and an expert in international macroeconomics — a large-scale view of how entire economies function. The climate has become one more factor for Colacito to consider when assessing economic health.

“I’m interested in global risks that are going to stick around for a long time,” he says. “And climate change isn’t going anywhere. Nobody around the world can escape this.”

Colacito and his collaborators conduct studies on how climate impacts the economy. In 2018, they produced the first paper to analyze how rising temperatures affect U.S. gross domestic products and gross state products — monetary values for the goods and services we produce. Their finding: Every one-degree Fahrenheit increase in average summer temperatures decreases state-level output by .15% to .25%.

“It’s a little like saving a small amount of money every month,” Colacito says. “On a month-by-month basis, it doesn’t change your savings account by a whole lot. But once you compound that small amount over 20, 30, 40, 100 years, it becomes a big number.”

In the worst-case scenario, rising temperatures could reduce U.S. economic growth by up to one-third over the next century, his research shows.

Making businesses sweat

The U.S. Census Bureau has tracked GSP since 1957, and weather data dates back even further. The researchers used that public information and conducted state-by-state analyses of temperature and economic activity for the four seasons of the year. They quickly focused on summer, the season when seemingly small increases in temperature make a big impact, and on one of the country’s hottest regions: the South.

“When you live in a place like North Carolina, and it gets extremely hot, even a small walk to go grab a coffee feels intense,” Colacito points out. “You feel more tired. You are less productive.”

Their paper cites numerous studies on how the heat affects our ability to work and overall health. This summer’s record U.S. heat wave resulted in dozens of deaths. Industries based largely outdoors — agriculture, forestry and fishing — aren’t the only ones impacted. Climate affects the finance, real estate, insurance, retail, wholesale and construction sectors — which comprise more than a third of the U.S. GDP.

High temperatures keep people inside their homes, increasing the importance of real estate decisions. High temperatures can also lead to hospitalization, which affects health insurance. And they even influence the auto industry, which drops production at its manufacturing plants when temperatures rise above 90 degrees.

Some industries, like utilities and mining sectors, actually benefit from rising temperatures, according to the paper. Warmer weather means more energy consumption and an increase in revenue.

Cooling the economy for the next generation

Colacito also directs Kenan-Flagler’s Center for Excellence in Investment Management. “A lot of investors are demanding corporations provide more disclosure about their exposure to climate risks and their carbon footprint,” Colacito says.

For example, corporations with headquarters or facilities in hazard-prone states like Florida and California may be more at risk of losing assets. Decisions these companies make contribute to the warming of the planet. Investors want to know what they are doing to offset that carbon cost.

“We need to trust the science that temperatures are bound to increase. If we keep neglecting it, then our research suggests that the economy is going to grow at a slower pace,” Colacito says. “And a slow economy is something we should care about. It may mean less jobs. It may mean less opportunities. It may mean that our children and grandchildren are going to have less resources going forward.”

Read more about Colacito’s research.