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Prolonged extreme heat may cost the state $9.5 billion, economist says

Construction workers work near downtown Austin during a heat advisory in June.
Michael Minasi
Construction workers work near downtown Austin during a heat advisory in June.

We’re headed into what’s historically the hottest month of the summer in what’s already been a year of record-breaking heat. Sweltering temperatures are showing no signs of letting up anytime soon.

For many Texans, one strategy to survive the heat dome has been to hunker down inside air conditioning for the hottest parts of the day – so, pretty much all of it.

But the mercury rising may be having a cooling effect on the state’s economy, according to research by economist Ray Perryman, of the Waco-based Perryman Group, who said the prolonged heat could cost Texas about $9.5 billion.

“In percentage terms, the biggest loss is going to be agriculture. It’s not that big a part of our economy right now, but it has a huge effect on agriculture in terms of crop yields and ability to bring in crops and things of that nature,” he said. “We’re already seeing a lot of concern about that, and it’s coming on top of what was already something of an historic drought. So the agriculture sector in relative terms gets hit the hardest.

“In terms of just the sheer dollars involved, it tends to be insurance companies, because they get hit with a lot of losses associated with these things. And they are a much larger industry.”

The Perryman Group calculated the $9.5 billion figure by looking at the history of temperatures and economic performances for all 50 states dating back to 1900.

“With the models we have, we can then isolate control for other factors and say, ‘what does an abnormal temperature have to do with the economy?’ And we can track that over literally hundreds of industries, and that allows us to come up with these net numbers,” Perryman said. “Obviously, just estimates – they’re not perfect – but I think they give us a very good indication of what’s going on.”

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The single biggest contributor – over 90% – to the losses is a decline in productivity, Perryman said.

“It has to do with, obviously, people. If you’re working outdoors, you have to have more breaks, you have to hydrate more, that kind of thing. More people have heat-related health issues that cause them to miss days of work,” he said. “It doesn’t create a huge amount of job losses right now – obviously we’re in a the workforce shortage situation, very low unemployment rates – but it creates a lot of drop in productivity.”

Some industries, like utilities, benefit during extreme heat as people hunker down and stay cool, Perryman said. For the hospitality industry, it’s a mixed bag.

“People tend to travel a little bit less and that sort of thing in some ways, and in other ways, a lot of people try to escape to other places. On balance, we have seen that the overall hospitality sector has just a little bit of a negative impact, but it’s not huge,” he said. “One thing we did notice, though, in a similar vein is overall retail sales would be down quite a bit. And of course that impacts sales tax and that sort of thing. And I think that’s mainly just people staying at home.”

The Perryman Group projected even larger economic losses for the future should heat trends continue.

“What we did there was not quite as extreme as this summer. But what if, we said, just on average that between now and 2050, the overall temperature was about one degree hotter than the norm that we’ve seen historically – what would that do across the economy? And we estimate that impact by 2050 would be almost $400 billion a year in gross product,” Perryman said.

“To put that in perspective, that’s over 9% of what we think the total gross profit would be at that point in time. So over the long term, when some of these losses cumulate, it causes people to, for example, shift away from agriculture, shift away from certain industries. In the long term, you have time to make those kinds of adjustments to things.

» MORE: How Texans are coping with the brutal heat, from Abilene to San Antonio

Perryman said that, from a policymaking front, focus should be on a functioning electric grid and encouraging the development of all types of power sources, as well as being cognizant of things that contribute to the inability to function well in heat.

“I think a lot of industries can do that. Insurance companies can encourage people to do things to minimize risk. They can sometimes be helped along by legislation,” he said. “I think overall, the bigger policy implications are probably at the federal and even the international level as we try to look at some of the consequences of what appears to be some changes in the climate, but also at the same time, make sure we have adequate energy resources. That’s quite a challenge.

“But I think most of that battle takes place in Congress and even beyond Congress in terms of international agreements and things of that nature.”

It’s possible that 2023 could go down as an inflection point, Perryman said.

“I think the combination of the 2021 freeze that we had here in Texas and then what’s happening with 2023 and particularly the widespread nature of the heat wave – not only in this country but other points across the country – may well be a point where people begin to realize a bit more that a lot of the things scientists have been talking about quite some time and some advocates have been talking about are the kinds of things we need to pay attention to more seriously,” he said.

“There’s nothing like being hot to make you sit down and think about what are the implications of being hot more often.”

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