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Original Risk: A Society for Change Agents

Weather variability can cost the U.S. economy $485 billion per year


A research paper due to be published this month in the Bulletin of the American Meteorological Society suggests that routine variations in the weather, such as rainfall and cooler or hotter than average days, can result in an annual cost to the U.S. economy of $485 billion.

The paper, which you can view a preliminary version of here (in PDF format), has been produced following a research study by the National Center for Atmospheric Research (NCAR) with co-authors from the University of Colorado Boulder, Lawrence Berkeley National Laboratory, and Stratus Consulting.

The study found that finance, agriculture, manufacturing and all other sectors of the economy are affected by the weather and its impacts are felt in every state.

“It’s clear that our economy isn’t weatherproof,” said NCAR scientist Jeffrey Lazo, lead author of the paper. “Even routine changes in the weather can add up to substantial impacts on the U.S. economy.”

It’s the first study to use a quantitative economic analysis to estimate the weather sensitivity of the entire U.S. economy.

The study shows that weather variability can impact both demand and supply of industries and that the effects of a specific weather variation can have contrasting effects on different sectors (for example heavy snowfall increasing heating costs but boosting profitability of ski resorts).

The press release from NCAR says that this study, unlike previous ones, combines analysis of historical economic data with economic modelling to produce a detailed report on the effects of temperature and precipitation on the U.S. economy.

The study shows that mining and agriculture are particularly sensitive to the weather with the mining economy affected as much as 14% per year and agriculture 12%. Other sectors on which weather has a significant effect are manufacturing, finance, insurance and retail all at 8% variability and utilities at 7%. Sectors with the least weather sensitivity were found to be services at 3% and wholesale and retail trade at 2%.

Weather sensitivity differs on a state by state basis and although every state is impacted the variability in economic impact is far from equal. New York is said to be most sensitive to the weather with as much as a 13.5% impact to the gross state product while Tennessee was found to be least impacted at just 2.5%. It’s worth noting that when aggregated across 11 sectors no state appears significantly more sensitive to the weather in relative terms. They suggest more research is needed to nail down more specific figures on the state level impacts.

The authors of the study say that they aim to refine their research and this initial study should be taken as an estimate. They also note that they didn’t include the effects of extreme weather events, such as tornado outbreaks, nor did they evaluate any possible impact of climate change on the results. At the moment the study focuses on heating degree days, cooling degree days and precipitation totals and deviations from average.

To our readers involved in the weather risk management sector or insurance none of this will be a surprise, however a study like this does add ammunition to your sales pitch. Too often business owners consider the weather extremes without having an appreciation of the economic impacts of weather variability on their bottom line. That’s where weather hedging techniques such as weather derivatives and index-linked weather insurance products come in to their own.

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