Economy gets a Haircut as Americans Don’t

The service economy is taking an unusually hard hit in the current economic downturn

By guest author Justin Lahart from Wall Street Journal

Graphic and captiion courtesy by Wall Street Journal

When a recession comes, it is usually manufacturers and other goods-producing industries that get kicked in the teeth. This time it is services’ turn.

The Institute for Supply Management said that its index for nonmanufacturing activity fell to 41.8 last month from 52.5 in March, marking its lowest level since March 2009. Anything below 50 represents a contraction in activity. As with its companion manufacturing gauge that came out last week, the index was again distorted by a slowdown in supplier delivery times: Usually when deliveries slow it is a sign that suppliers are struggling to meet rising demand and business is picking up. Now it is because the novel coronavirus crisis has disrupted supply chains. The other components of the index—business activity, new orders and employment—were at their lowest levels in the 24-year history of the data.

All but 3 of the 22 industries in the nonmanufacturing report are in the services sector, and the drop it is showing reflects the unprecedented hit the sector has taken from the coronavirus crisis. In past recessions it has always been goods-producing sectors such as manufacturing and construction that have suffered the most and that have driven declines in activity—even during the last recession, which was unusually harsh for services. Commerce Department figures show the 2.9% decline in private service-sector activity back then was dwarfed by an 11.7% drop in goods-providing activities.

But one of the things that makes this recession different, and also so severe, is that it is being driven by losses in the service sector. Shutdowns and other social-distancing measures are walloping areas of the economy that were better shielded in previous downturns. People, feeling pinched in the past, may have deferred big-ticket purchases like new cars, but they didn’t entirely stop going to restaurants, much less getting their hair cut.

Part of why that is so bad for the economy is that the private service sector is so large, accounting for about 70 % of gross domestic product compared with about 17 % for the goods-producing sector. Moreover, more than five times as many employees work in the private service sector as the goods-producing sector. Friday’s employment report will reflect how bad the damage has been. An analysis of data from scheduling and time-clock software provider Homebase conducted by economists André Kurmann, Etienne Lalé and Lien Ta suggests it will show two service-sector industries alone—leisure and hospitality and retail—shed about 20 million jobs last month.

The damage to the service sector will also shape the recovery, when it comes. After a typical recession ends, there is usually a bounce back in spending as people and businesses catch up on deferred spending—they finally trade that clunker in for a better car, or replace that equipment that got worn down. That will certainly happen to an extent when this recession ends but, as economist Gabriel Mathyhas pointed out, much of the business that has been lost in this recession will be gone for good. People may flock to restaurants, but not enough to make up for all the meals out they didn’t have. And they will never make up for the missed haircuts.