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Economic Insights

The heavy concentration of job losses in the service sector in March 2020 stands in stark contrast to the experience of the 2008-09 financial crisis. 

Headline job losses in the March 2020 U.S. employment report released by the U.S. Bureau of Labor Statistics (BLS) on April 3 were almost identical to the average monthly losses during the worst six months (October 2008-March 2009) of the global financial crisis, or GFC. But the composition of the decline in the report revealed a very different dynamic at play; almost two-thirds of the jobs lost last month were in leisure and hospitality industries as some companies shut down operations almost immediately.

Almost all were from food services and drinking places. The other two major components of the sector – arts, entertainment & recreation and accommodations – barely shed any workers. It seems inevitable, however, that many more jobs from those industries will be lost in April.

The contrast with the experience during the GFC is striking. In 2008-2009, employment losses were severe across a very broad group of industries, goods producing and service-providing, as declining aggregate demand reduced spending across the board. The current downturn started as a supply shock in service-providing industries that produced output commonly consumed in close proximity with other people.

In our view, the initial shock to supply in a limited number of industries is likely to transform into a demand shock across a much broader set of industries as directives for non-essential workers to quarantine actively encourage households to curtail consumption until the risk of infection is reduced and severe illness can be managed without exceeding the capacity of the U.S. healthcare system.

We believe the 9.9 million increase in initial claims for unemployment insurance over the two weeks ended March 28 (based on BLS data) guarantees that the distribution of job losses in coming months will spread into industries that weren’t affected severely in March: manufacturing, construction, distribution (retail, wholesale, transportation & warehousing), professional and business services, and education. Even as job losses in the current downturn likely take on more and more of the attributes of 2008-2009, curtailment of activity on the supply side of the economy will continue to affect services much more severely than in a typical recession.

A Potential Recovery Scenario
The good news is that a large portion of the job losses in service-providing industries are part of a government strategy for limiting the spread of the virus and, in that sense, a voluntary curtailment of supply as opposed to a reflection of an involuntary reduction in aggregate demand. If public policy is successful in bridging the gap to the time when the threat from the virus is reduced sufficiently for consumption of a broad range of services to resume, the immediate employment recovery and increase in payrolls should be very strong, in my opinion. The problem will be to figure out how to maintain support for businesses and employees where demand revives more slowly than potential supply can be restored.

 

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