Now and then: how different downturns affect the Southeast service sector: conventional wisdom holds that service-producing industries are better able to weather economic slumps than are goods-producing industries and can be expected to provide stability during downturns. But the recession that began in March 2001 may show that this assumption requires a second look - Regional Focus

EconSouth, Spring, 2003 by Navnita Sarma, John Robertson

What a difference a decade has made in the composition of the Southeast's economy. While traditional manufacturing activities such as apparel, paper and textile production were shutting down and moving operations offshore over the past 10 years, the service sector, especially activities related to communication services, transportation and general business services, was rapidly expanding in the region. In 1992 the Southeast's service industries accounted for some 79 percent of the region's total nonfarm payroll employment. Today that share is closer to 83 percent. In Florida, which exceeds the national average because of its heavy focus on tourism and health care, the service sector's share of employment increased from 86 percent of employment in 1992 to 88 percent in 2002.

Conventional wisdom holds that service industries, especially those outside of retail and wholesale trade, are less affected by changes in aggregate supply-and-demand conditions than are goods-producing industries, such as manufacturing and construction. Performance during past recessions upheld this belief, and analysts have often argued that growth in these types of service industries adds stability to an economy. But the most recent recession has put this assumption to the test.

The national service sector: Similarities and differences over time

In some ways, the national recession that began in March 2001 was similar to the recession that began in July 1990 and ended in March 1991. For instance, 2001 saw a net decline of a little less than 1 percent in payroll employment in the United States; by comparison, during the 1991 recession, employment declined just over 1 percent.

As in the earlier recession, manufacturing accounts for the bulk of the decline in national employment this time around too, subtracting about 1 percent from total U.S. employment rolls since March 2001. As is typical during a downturn, the government sector--comprising federal, state and local governments--has added modestly to payrolls. The drag caused by the loss of retail and wholesale trade jobs has also been similar between the two recessions. But that's where the similarity ends.

The construction industry provides an example of the differences between the two recessions. The cut in payrolls in this industry since March 2001 is not anywhere close to the cuts during the 1990-91 recession. This difference reflects the relative strength of the demand for new housing during the current period, tempered only by weakness in commercial construction.

Another important difference between conditions today and during the recession of a decade ago is the relatively poor performance of transportation and communication service industries (see the table on page 11). The overcapacity problems plaguing the telecommunications industry and Sept. 11's adverse consequences on the transportation industry explain why these industries have not fared as well as they did in the 1990-91 recession.

Other service industries play a role

The relative performance of a category referred to as "other" services over the past year and a half also differed markedly from the early 1990s. This broad service industry category--which includes hotels, temporary staffing firms, health care providers, computer support services and data processors, auto repair businesses, and engineering and management service companies--has been growing in size and relative importance over time.

For the nation as a whole, employment in these industries as a proportion of total employment increased from less than 27 percent in 1992 to more than 31 percent in 2002. This increased employment share reflects the rapid growth in these service industries relative to manufacturing. In 1992 manufacturing accounted for 17 percent of total employment in the nonfarm sector; this share declined to slightly over 13 percent in 2002.

The overall contribution of other services to employment during the most recent downturn has been considerably less than during the prior downturn, and this difference can be traced to a number of factors. For one thing, temporary staffing firms saw a sharp decline in demand for their services starting in late 2000 and persisting throughout 2001. Temporary workers or those on the temporary staffing firms' payrolls are counted as part of the service sector regardless of what industry they may actually be working in, so part of this decline reflects the coincident weakness in manufacturing. But office clerical staff reductions also accounted for a significant part of the most recent decline. During the 1990-91 recession, in contrast, temporary staffing employment declined for only six months before rising again.

Demand for additional types of business services, such as computer and data processing, has also taken a more significant hit during this downturn. This development is partly a result of the dot-com implosion in 2000 and partly a consequence of generally lower business spending on information technology. The hotel industry and amusement and recreational services make up another group of service providers that have experienced a distinct slump in employment during the most recent downturn, especially following Sept. 11. Employment at hotels and amusement and recreational facilities declined by some 4 percent in 2002, more than twice the next-largest percentage decline, which was experienced in 1991.