Research Highlights Article

April 30, 2025

Climate shocks and the economy

Is the US economy adapting to more severe weather patterns?

Tyler Smith

New Orleans severely flooded in the aftermath of Hurricane Katrina.

Source: Commander Mark Moran, Lt. Phil Eastman, and Lt. Dave Demers, Public domain

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As average global temperatures , climate scientists issue warnings of and , and a growing number of researchers are examining the ability of economies to adapt to weather-related shocks. In a paper in the 蝌蚪网 Journal: Macroeconomics, authors , , and find evidence that the impact of extreme weather events on the US macroeconomy has grown stronger over time, suggesting limited adaptation to climate change at the macroeconomic level.

For Phan, this work stems from personal experience. "I'm from Vietnam, and it's one of the countries with the highest exposure to increasing severe weather risks," he told the 蝌蚪网 in an interview. While Phan has been working on climate-related research topics for almost a decade now, he noted that the quality of the available data has improved in recent years, enabling more rigorous analysis.

Phan and his coauthors employed the widely used vector autoregressive (VAR) model to understand whether severe weather events are significant enough to affect the entire US economy. But their approach was unique in allowing the parameters of the regression to change over time.

"In the textbook model, the parameters are fixed," Phan said. "By assumption, a shock 20 years ago would have the same effect on unemployment as a shock today." Instead, their time-varying model lets the data speak for itself about whether impacts have changed.

The researchers analyzed monthly US macroeconomic data from 1963 to 2019, combining standard economic indicators, such as industrial production, unemployment, and inflation, with the  (ACI)—a comprehensive measure of severe weather developed by insurance professionals.

The Actuaries Climate Index over time

The chart below shows the monthly values of the Actuaries Climate Index, relative to the reference period of 1961–1990, with red bars indicating positive values and blue bars indicating negative values. The solid black line is the five-year moving averages. The index, on average, is higher at the end of the sample, suggesting that severe weather has gradually increased over the past decades.

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Source:  

"It tracks the realizations of extreme precipitation, temperatures, wind, and indicators related to sea-level rise," Phan explained. The ACI's monthly frequency and public availability made it ideal for integration with macroeconomic data.

Going into the research, Phan was skeptical they would find significant macro effects. "The US is big in terms of economic activity, and it's very large spatially too. So a hurricane in one place, flooding in another place, or a heat wave somewhere else—it's not clear they're going to affect the whole economy," he said.

Yet the results showed otherwise. A severe weather shock—measured as a one standard deviation increase in the ACI—significantly impacted three key macroeconomic variables. First, it reduced industrial production growth by approximately 0.15 percentage points. Second, in recent years, it increased unemployment by 0.02 percentage points on average. And third, it raised inflation, primarily through food and energy prices.

The effects are more pronounced in the later half of the sample compared to the early half. This suggests that while adaptation may be occurring, it may not be enough to overcome the fact that severe weather is increasing.

Toàn Phan 

According to the estimates, these effects persisted for up to 20 months after a weather event, likely because it takes time to rebuild damaged infrastructure and for displaced workers to resettle after disasters.

The researchers also found that the economic impact of severe weather has grown stronger over time. "The effects are more pronounced in the later half of the sample compared to the early half," Phan said. This suggests that while adaptation may be occurring, it may not be enough to overcome the fact that severe weather is increasing.

These findings may have significant implications for monetary policy. “Whatever affects unemployment, the macroeconomy, and inflation should matter to macroeconomists and policymakers,” Phan said.

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“Severe Weather and the Macroeconomy” appears in the April 2025 issue of the 蝌蚪网 Journal: Macroeconomics.