The Recession and Recovery from an Industry Perspective
Real GDP grew at an annualized rate of 0.1 percent in the fourth quarter of 2012, according to the Bureau of Economic Analysis’s revised estimate. Although this revision may confer the important psychological effect of keeping a streak of 14 consecutive quarters with positive growth alive (the BEA’s first estimate indicated a 0.1 percent decrease in real GDP), the reality is that the U.S. economy stagnated in the last quarter of last year. This deceleration—growth in the third quarter of 2012 was a robust 3.1 percent—primarily reflected decreases in federal government spending, as military spending fell at an annualized rate of 22 percent, and private inventory investment.
If we compare the whole year of 2012 to 2011, the picture is only slightly rosier. While growth increased from 1.8 to 2.2 percent, this is very much on par with the average growth rate for the recovery, but well below that of previous ones. It is important to note that the acceleration in growth we experienced from 2011 to 2012 occurred even as the contribution of personal consumption expenditures, the most important component of GDP, actually diminished. Going forward, if we could only combine the sort of contribution we had from personal consumption expenditures in 2011 with the one we had from private domestic investment in 2012, maybe we could finally get a GDP growth rate in 2013 that would match a more normal recovery pace.
The overall growth rate of real GDP hides a fair amount of heterogeneity across industries. While the output of all U.S. domestic private industries just recently surpassed its 2007:Q4 peak, some industries remain well below that benchmark. Most notably, construction remains extremely depressed following the housing market collapse and has yet to see meaningful signs of a recovery. Another industry that still remains below the pre-recession peak is manufacturing. This industry has actually been staging a fairly speedy recovery, but it had a deeper hole to climb out of, having been battered more than the average during the recession.
On the other extreme there are industries that seemingly breezed through the recession, like education, health care, and social assistance (EHSA). This industry certainly benefited from the fact that a lot of people who became unemployed decided to go back to school and that medical expenditures stay fairly constant even when incomes decline. Curiously, an industry that came under a lot of pressure during the recession, finance, insurance and real estate (FIRE), has fared substantially better than average and hardly experienced a decline during the whole recession episode.
While both EHSA and FIRE have increased their production during the recovery, they have gone about it in slightly different ways. To see this, it helps to think of an industry’s output as depending on the total hours of work it uses in production and how productive those hours are. In increasing its output, EHSA relied more on the former than on the latter. In contrast, FIRE was able to increase its output while reducing its total hours, achieving nearly 10 percent productivity gains.
Similarly, after being badly hit up until the recession’s trough in the second quarter of 2009, manufacturing and construction have relied mostly on productivity gains to recover. In the case of manufacturing, productivity gains have helped the industry increase its output, while in the case of construction, they have helped to keep output constant in the face of a decline in total hours worked.
Total hours worked, in turn, are simply the product of the number of employees and the average hours each employee works: in economic jargon these are referred to as the extensive and intensive margin, respectively. In a typical recession, businesses make more use of the extensive margin than the intensive margin to adjust their labor input. That is, they let employees go rather than reduce hours. From peak to trough of the last recession, for example, businesses made only a 2 percent reduction in the average hours of their remaining employees. While by adjusting the intensive margin, employers economize on the hourly wage, they save on a variety of fixed costs by firing an extra person. In the last recession, this tendency was mostly noticeable in FIRE, where average hours never fell.
A word of caution in interpreting these cross-industry differences: adjustments to labor input do not occur in a vacuum. They are ultimately a function of technological change and consumer preferences and depend (and in turn help determine) product and factor prices for each industry. Finally, they also depend on labor market conditions that are industry-specific. As an example, industries with higher unionization rates, everything else being the same, will tend to see relatively smaller decreases in the extensive margin, as firing costs are relatively higher.
The four industries we have highlighted here cover only 50 percent of total private production. But they serve to illustrate the different ways that U.S. industries adjusted their production and labor usage during the last recession.