Weather and the Economy

Paul Walsh, Sr. VP, Business Solutions
November 2, 2010

As the year-end approaches, organizations review fiscal results and examine underlying trends. Senior executives are analyzing opportunity and risk scenarios as they plan for the months and years ahead. Regardless of industry, there is a major economic factor that impacts all commercial activities. Weather.

It has been estimated that 30 percent of gross domestic product is directly or indirectly impacted by weather and climate. But weather’s impact on the economy varies enormously from place to place. We like to say that weather impacts are not only specific to location, but also activity.

For example, consider an 80-degree day in California. In San Francisco, that’s considered hot enough for people to buy an air conditioner. But in Sacramento, 80 degrees causes people to pack a sweater. It is the combination of weather and location that provides powerful predictions of consumer behavior.

Weather impacts many aspects of the economy in addition to consumer demand. Following are a few critical impacts:

  • Commodity demand: Local weather controls commodity supply and creates commodity demand. A freeze in the Florida citrus orchards reduces the supply of oranges and increases prices for suppliers in other locations. Colder winters in the Northeast increase the demand for fuel oil.
  • Supply chain: Weather causes business interruptions and supply chain outages. Snow and ice can slow or shut down transportation. High heat can cause brown outs and “voluntary” cut-backs of electricity use. Ice storms can down power lines.
  • Emergencypre-positioning: Last winter, a massive ice storm left thousands without electricity for two weeks in central Massachusetts and southern New Hampshire. Utility companies share work crews across hundreds of miles in the aftermath of such an event. While it is hard to forecast such events accurately enough to pre-position work crews across substantial distances, forecasts can be used to prime advance planning so that the emergency crews will be in a state of readiness.