Global| Oct 29 2020A Unique Business Downturn & Environment: It's All About The Service Industries
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Summary
The 2020 economy will be remembered for the record plunge in Q2, and its record rebound in Q3. Yet, the most unusual or unique feature of the economy's performance, or downturn, is its mix. The 2020 downturn is the first economic [...]
The 2020 economy will be remembered for the record plunge in Q2, and its record rebound in Q3. Yet, the most unusual or unique feature of the economy's performance, or downturn, is its mix.
The 2020 downturn is the first economic recession in the post-war period that was largely concentrated in the services industries, instead of the more cyclical sectors, goods, and structures. A sustainable recovery cannot occur until the service sector is fully open because it accounts for roughly 60% of GDP and over 85% of the employed workforce.
GDP's Record Fall and Rebound
According to its advance estimate, the Bureau of Economic Analysis (BEA) reported Q3 real GDP increased at an annual rate of 33.1%, following the 31.4% drop in Q2. The three product sectors all posted record advances, led by goods up 59%, services 24%, and structures 16%.
Even with the record rebound, the level of Q3 real GDP is still $500 billion (annualized) below that of Q1. That deficit is centered on the output of the services industries, while output in the goods sector has rebounded to a new record high. Both are unique features as the goods sector never recovers so quickly and the service sector never contracts.
According to the GDP data, the Q3 output of the service industries, which includes health care, transportation, education and recreation and entertainment, stands $500 billion below that of Q1. That deficit is so large that for time in the post war period the service has posted a contraction over the past 12 months.
Contrast that performance with the more cyclical goods sector. In Q3, the output of the goods sector, which includes the production, distribution and retail selling of products, jumped to a new record high, recovering the entire decline in Q2 and more.
The recovery in the goods sector has been in part powered by the recession in services. That is, spending that would normally been directed towards consumer services such as travel, hotels, recreation and entertainment has been shifted to household goods and products.
But that shift in spending patterns has a limited life. That's because private and public service industries account for 85% of all jobs, which in turn generates the income to spend on goods and services.
The partial re-opening of the economy has triggered a rebound in service sector employment. However, September's service sector jobs were still 10 million below the levels in early 2020.
Failure to legislate another round of federal stimulus at the same time the number of COVID cases are rising to record levels forcing states and localities to impose new restrictions on businesses raises the risks of more layoffs and a weaker spending impulse in coming months.
Viewpoint commentaries are the opinions of the author and do not reflect the views of Haver Analytics.
Joseph G. Carson
AuthorMore in Author Profile »Joseph G. Carson, Former Director of Global Economic Research, Alliance Bernstein. Joseph G. Carson joined Alliance Bernstein in 2001. He oversaw the Economic Analysis team for Alliance Bernstein Fixed Income and has primary responsibility for the economic and interest-rate analysis of the US. Previously, Carson was chief economist of the Americas for UBS Warburg, where he was primarily responsible for forecasting the US economy and interest rates. From 1996 to 1999, he was chief US economist at Deutsche Bank. While there, Carson was named to the Institutional Investor All-Star Team for Fixed Income and ranked as one of Best Analysts and Economists by The Global Investor Fixed Income Survey. He began his professional career in 1977 as a staff economist for the chief economist’s office in the US Department of Commerce, where he was designated the department’s representative at the Council on Wage and Price Stability during President Carter’s voluntary wage and price guidelines program. In 1979, Carson joined General Motors as an analyst. He held a variety of roles at GM, including chief forecaster for North America and chief analyst in charge of production recommendations for the Truck Group. From 1981 to 1986, Carson served as vice president and senior economist for the Capital Markets Economics Group at Merrill Lynch. In 1986, he joined Chemical Bank; he later became its chief economist. From 1992 to 1996, Carson served as chief economist at Dean Witter, where he sat on the investment-policy and stock-selection committees. He received his BA and MA from Youngstown State University and did his PhD coursework at George Washington University. Honorary Doctorate Degree, Business Administration Youngstown State University 2016. Location: New York.