Weathering the storm: how extreme weather impacts U.S. output growth

In their study “Time-Varying Effects of Extreme Weather Shocks on Output Growth of the United States,” published in Finance Research Letters in 2024, authors Xin Sheng, Rangan Gupta, and Oguzhan Cepni explore the economic consequences of extreme weather shocks on U.S. GDP growth and inflation from 1961 to 2022. With climate change intensifying the frequency and severity of such events, understanding their long-term effects has become increasingly important. The study examines how these impacts have evolved over six decades and highlights the crucial role of adaptation in mitigating economic vulnerabilities raising an essential question: how effectively has the U.S. economy adjusted to the persistent challenges posed by climate-related disruptions?

The economic toll of extreme weather

Extreme weather disrupts economies through multiple pathways. It reduces worker productivity, damages infrastructure, and lowers the quality of capital, while also creating uncertainty that dampens consumer spending and business investment. These shocks slow economic growth and drive inflation, particularly affecting vital sectors like energy and agriculture. The research delves into these dynamics, analysing not just the immediate consequences of physical climate change but also how the economy has responded and adapted over time.

Mapping economic resilience through data

The study employs a time-varying parameter vector autoregressive (TVP-VAR) model to examine how extreme weather impacts GDP growth and inflation over six decades. The analysis relies on the Actuaries Climate Index (ACI), a detailed metric that tracks severe weather events such as droughts, hurricanes, and heavy rainfall, providing a comprehensive measure of climate-related shocks. Unlike static models, this dynamic approach captures how the economy’s response to extreme weather has evolved over time, reflecting changes in resilience driven by adaptation efforts. By integrating the ACI with macroeconomic data, the study provides insights into patterns of adaptation, showcasing how investments in infrastructure and renewable energy have significantly reduced economic vulnerabilities and strengthened long-term resilience.

The changing dynamics of economic resilience

The findings show that the U.S. economy’s vulnerability to extreme weather has significantly decreased over time. During the 1980s and 1990s, weather-related events caused notable disruptions, slowing growth and increasing inflation. By contrast, since the early 2000s, these impacts have diminished considerably. This progress aligns with increased investments in climate-resilient infrastructure, advanced technologies, and renewable energy initiatives. The results suggest that proactive adaptation measures have played a pivotal role in enabling the economy to better absorb and recover from weather-induced shocks, at the macroeconomic level.

Building a climate-resilient future

The study highlights the critical importance of proactive strategies to minimize the economic consequences of extreme weather. Investments in disaster-resilient infrastructure, renewable energy, and technological innovation have proven effective in reducing climate vulnerabilities. Policymakers must sustain and expand these efforts by upgrading urban planning and construction standards to better withstand severe weather, fostering agricultural practices resilient to climate variability, and increasing reliance on renewable energy to reduce fossil fuel dependency.

These measures not only protect economies from immediate risks but also provide long-term stability and growth opportunities. The U.S. economy’s growing resilience serves as a valuable blueprint for other nations, demonstrating how adaptation and innovation can transform climate challenges into avenues for sustainable development. By prioritizing these strategies, policymakers, researchers, and businesses can navigate the uncertainties of a changing climate while securing a more stable economic future.

Read the full paper: Time-Varying effects of extreme weather shocks on output growth of the United States

Full paper reference: Sheng, X., Gupta, R., & Cepni, O. (2024). Time-Varying effects of extreme weather shocks on output growth of the United States. Finance Research Letters, 70, 106318.