Texas economy slows as summers get hotter, Dallas Fed economists say

An Austin Metro bus flashes a “Come in cool off!” message as it drives on Guadalupe Street on a hot July day. Economists at the Dallas Fed say extreme heat cools the state's economy. (Credit: Kylie Cooper/The Texas Tribune)

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Each degree of warming in Texas slows the state’s economy, an analysis by economists at the Federal Reserve Bank of Dallas found.

Extreme heat this year may have cost the Texas economy $24 billion, or reduced the state’s nominal gross domestic product, or GDP, by about 1 percentage point in 2023, the economists calculated in a report released Wednesday.

Using data from the last two decades, the economists found that in general, for every degree of higher temperature in summer, Texas sees a slowdown of 0.4% in economic growth. The results are in line with previous economic studies that have found hotter summers tend to reduce business activity.

The Texas economy was twice as impacted by heat than the rest of the country, the analysis found, because the summers here are generally among the hottest in the nation. As temperatures move upward, the negative effect on the economy becomes more pronounced. Warming from 70 degrees to 71 is less impactful than warming from 80 degrees to 81, for example.

Summer heat is becoming more and more extreme: Climate change has made heat waves more common and severe in Texas than in the past. The impact to human health is well documented: Heat is one of the most deadly types of weather, typically killing more people annually than hurricanes, tornadoes or floods. This summer in Texas, at least 97 Texans died from heat-related illness, according to the Texas Department of State Health Services (a number that’s almost certainly an undercount).

For the economy, extreme heat keeps customers at home rather than going out to shop or dine and prompts some people to make vacation plans in cooler places than Texas. It can reduce agricultural crop yields and slow down construction projects.

“The economy will need to adapt,” said Anil Kumar, an economic policy advisor and senior economist at the Dallas Fed, and one of the authors of the analysis. “Communities may adapt by adopting more technology to be more sustainable and other ways to mitigate the effects of heat waves.”

The heat also impacts businesses’ productivity: A quarter of companies responding to a Dallas Fed survey in August reported lower revenue or lower production due to the heat, citing lower customer demand and reduced labor productivity. The state’s leisure and hospitality, transportation, and retail sectors were among the most impacted.

Industries whose workers are frequently outdoors — including the oil and gas industry and construction — saw a notable slowdown in employment growth related to the heat.

Though economists found a clear negative impact to the state’s economy from hotter summers, warmer temperatures brought by climate change may actually boost the state’s economy in the spring and fall — if it’s a perfectly even increase year round, then in some years the boost could outweigh the negative impacts of the summer.

The positive effect on growth in those seasons could be because warmer springs allow farmers to plant earlier in the season and boost real estate sales. Kumar also said that as summers have become more extreme, Texas companies may already be shifting business activities to the spring and fall.