How Weather Influences the Economy
By Cecilia Sze and Paul Walsh
Weather impacts all commercial activities. Estimates indicate that 30 percent of gross domestic product is directly or indirectly affected by weather and climate. But the effects of weather vary enormously from place to place. Weather impacts are location- and activity-specific. Take an inch of snow. In Buffalo, New York, it's no problem. But in Washington, D.C., one inch of snow causes the United States government to cancel all nonessential business. Or consider an 80-degree day in California. In San Francisco, that's considered hot enough to buy an air conditioner. But in Sacramento, 80 degrees warrants wearing a sweater. It's the combination of weather and location that provides powerful predictions of consumer behavior.
Predicting Consumer Demand
Weather is critical for predicting year-over-year same-store sales (see Figure 1). We can estimate this well in advance of forecasting the weather. Day-to-day weather can be predicted one or two weeks in advance, depending on weather patterns. Longer-term outlooks of average conditions can be made weeks to months in advance. In some situations for some regions, such as winter in the Northeast, we can make useful predictions months ahead of time using combinations of forecast techniques.
Retail Sales and Temperature Change
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The graph illustrates the correlation (in percent) of year-over-year September retail sales change with temperature change, based on data for 2001 to 2008. Higher correlation percentages indicate a higher impact by temperature change.
While year-ahead predictions of weather during a particular week are not skillful, we do have exact knowledge of past weather, which can be a significant component in year-over-year sales. It's safe to say that the weather next year will be closer to the long-term average than
to the weather of the year just passed (see Figure 2). With appropriate analytical techniques, we can predict consumer demand location by location (down to the ZIP code level) and week by week for items with weather-driven demand, such as ski equipment and beach apparel.
Wide-Ranging Economic Impacts
Weather influences many aspects of the economy in addition to consumer demand. Following are a few critical impacts.
Commodity demand — Local weather controls commodity supply and 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. We routinely use our seasonal temperature outlooks to create population-weighted degree-day forecasts.
Supply chain — Weather causes business interruptions and supply-chain outages. Snow and ice can slow or shut down transportation. High heat can cause brownouts and cutbacks of electricity use. Ice storms can down power lines.
Emergency pre-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 predict such occurrences accurately enough to pre-position work crews across substantial distances, forecasts can be used for advance planning so emergency crews will be in a state of readiness.
Kohl's Sales and Weather
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The AER Weather Index explains 85 percent of the variability in Kohl's department store September sales changes between 2001 and 2009. The 2008 sales results are omitted because of the extraordinary sales declines following the onset of the credit crisis. Red dots signify points where the temperature was warmer than the prior year. Blue dots
signify points where the temperature was colder than the prior year.
Weather, Location, and the Insurance Industry
The insurance industry can use weather information to evaluate risk. Location-specific weather — hurricanes, flooding, severe wind, and other perils — affects risk and loss. Even weather and climate not considered important in one location can be critical in another. A dry season in Southern California followed by a few days of Santa Ana winds funneling through a particular canyon can lead to extremely dangerous conditions in one neighborhood but not to a neighborhood a few miles away.
Weather knowledge is critical to responders, from firefighters to claims adjusters. However, fire is just one example. Weather elements like fog, rain, and icing can cause personal injury (automobile, property/casualty, workers compensation, and health). Conditions conducive to mold growth influence health, mortgage risk, and cost of repairs. Trends and cycles in risk vary according to trends and cycles in weather parameters that result from climate change and natural weather oscillations.
Cecilia Sze is CEO and Paul Walsh is senior vice president of business development at Atmospheric and Environmental Research (AER). A Verisk Analytics subsidiary, AER provides cutting-edge environmental research, development, software tools, and analysis.