Extreme Heat Will Stifle US Economy, Fed Study Says

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A recent study conducted by the Federal Reserve Bank of San Francisco predicts that extreme heat will have a negative impact on the US economy. The study highlights that the construction sector, which contributes significantly to the country’s economic output and employs a large number of outdoor workers, will be particularly vulnerable. The research suggests that if no significant measures are taken to reduce carbon emissions, the capital stock could decrease by 5.4% and annual consumption by 1.8% by the year 2200. These findings emphasize the urgent need for action to mitigate the effects of climate change on the economy.
According to the study, the number of days per year in which outdoor workers will experience heat stress above safety thresholds for “heavy work” is expected to increase significantly by the end of the century. The projections indicate that this figure will rise from 22 days in 2020 to approximately 80 days by 2100.

In order to assess the potential impact of labor productivity losses due to extreme heat on the economy, the authors analyzed economic output from 1950 to 2019 across five sectors. The services and manufacturing sectors were found to have the largest role, as most work in these sectors is conducted indoors with climate control. However, construction constitutes the largest share of the remaining outdoor sectors, which also include agriculture and mining, in terms of US output.
The authors of the study developed a model to analyze the impact of sector-specific productivity on macroeconomic outcomes. According to the paper, the construction industry plays a significant role in US investment, and any decline in productivity in this sector would have long-term effects on the economy by impeding capital accumulation.

The researchers conducted a comparison of the capital stock in two scenarios. In one scenario, there is no increase in extreme heat exposure beyond 2019, while in the other scenario, the number of extreme heat days rises to 80 by 2100.

The study found that future increases in extreme heat would lead to a decrease in the capital stock of approximately 1.4% by 2100 and 5.4% by 2200. This reduction in the capital stock hampers the economy’s ability to generate output, resulting in a decrease in consumption. Therefore, the study concludes that extreme heat reduces annual consumption by 0.5% in 2100 and 1.8% in 2200.
The authors did mention some important considerations. Companies and employees might explore alternatives such as shifting production to cooler regions or scheduling work during cooler times of the day.