The Service Economy

The Service Economy

August 07, 2020
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Last week’s historically awful GDP number was shocking, down 32.9%. But when we get into the details of the component parts of that negative print, what we really see is how much the economy has changed over the last 40 years or so. Since 1982, there have been four US recessions. That’s an average of one every 9.5 years. Prior to that, between 1946 and 1982, recessions occurred on average every 4 years. Why the change?

 

The largest detractor from growth this last quarter was services consumption. Goods consumption subtracted 2.2% while services took down 22.9%. And when you think about it, what has practically come to a standstill in this Covid economy? Hospitality, cruise lines, restaurants, bars and nightclubs, travel and entertainment are all services sub-sectors that are completely stopped or barely showing a pulse. They are also the parts of the economy that over the last decades have become the lion’s share of GDP. It is often said the consumer is 70% of the US economy. And the majority of that consumption is tied to services.

 

Forty years ago and before, the consumption of goods was the major component of growth. Manufacturing and industrial production were the drivers and the ability of companies to react to downturns was limited given the nature of managing inventories, materials and final sales. With services, the “inventory” is in a sense workers. That’s much easier to manage through furloughs, layoffs and hourly reductions. This is why recessions are less common now.

 

It’s also why we will need to see better virus control responses, downturns in case numbers and ramped up vaccine and treatment options before service workers can get back on the job and the economic data really improves.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

 

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

 

The companies presented here are for illustrative purposes only and are not to be viewed as an investment recommendation.