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Trends and Cycles Across Industries in the U.S. Economy

In an earlier post, (2013) we discussed the long term decline in the share of manufacturing in the US economy. In this post, we will analyze the relationship between long-term structural changes and transitory shocks that have taken place in the US economy since World War II. Total GDP has increased by a factor of eight over this period of more than half a century, and the structure of production has experienced many changes. Table 1 shows how the shares (weights) of major industries in US GDP changed from 1947 to 2013:

The biggest change was the decline in the share of output coming from manufacturing  from 25.6% in 1946 to 12.1% in 2013. This decline has received considerable attention from leaders of both political parties who have promised to restore manufacturing to its previous prominence. President Obama has called for a “Renaissance” in U.S. manufacturing. Since manufacturing has been a large employer of workers with middle skills and middle wages, slower growth in manufacturing output and employment has contributed to the increase in the inequality of wages among workers with different skills.

The other major trend is the secular decline in the share of output coming from agriculture, which dropped from 8.2% in 1946 to 1.4% in 2013. This trend began in the 19th century, and it is related to slow growth in demand, as shown by the long-term decline in the share of food in the budget of the typical consumer (Engel’s Law).

It should be noted that declining shares of GDP for manufacturing and agriculture do not imply that total production in those sectors decreased. It just means that production in those sectors grew more slowly than GDP. Total output in those sectors continued to grow even after sectoral employment decreased, due to large increases in output per worker.

Other sectors must be expanding, since relative shares must add up to 100% of GDP. Business and Professional Services showed the largest growth from 3.3% to 11.8% of GDP.  There has been a general movement in both production and employment from agriculture and manufacturing to all kinds of services. Business services have become a net export for the U.S. Educational services, health care, and social assistance is another service industry whose share is trending upward from 1.9% to 8.2%.

Some sectors, such as mining, utilities, and construction have had roughly constant shares, and government has shown a small increase from 12.5% to 13.2%, however, even these sectors have been affected by temporary shocks. For example, the GDP share of mining grew from 2.3% in 1979 to 3.9% in 1981 and then gradually fell back to 1.6% by 1986.

The U.S. economy has experienced a series of temporary shocks that alter the distribution of output by industry. Recessions have been the main transitory shock, and we have constructed an index that shows the total change in relative weights of the above industries in GDP over a period of three preceding years for each year during the period from 1950 to 2013 and could be defined as:

∑ |wi,t – wi,t-3|/2 where

wi,t = percentage weight of an industry in GDP in year t

wi,t-3 = percentage weight of the same industry in GDP in year t-3

The sum of the absolute value of the changes is divided by 2 as every increase in the weight of an industry in GDP is matched by a corresponding decline in the weight of another industry.

Applying the formula to the dataset from 1947 to 2013 we get the picture of shocks to the US economy depicted in the chart below:

Figure 1

The first observation from Figure 1 is that some shocks to the economy are taking place nearly all the time. There is only one period in the 1960s when the index of shocks points at relatively little structural change. There were also a number more active periods when shocks were more pronounced than during other times.

The most significant shock occurred during the three year period between 1979 and 1982, following the oil embargo. The periods with the greatest shocks are associated with recessions or stagnation, as shown in Figure 2. This is the case in 1954, 1958, 1982 and 2008-2009 (Great Recession) and to a lesser extent in 2001-2002. By definition of a recession, total output in the economy falls, but some industries are affected much more than others.

Figure 2

The frequent shocks to the economy and the frequent changes in the shares of industries show the importance of a well-functioning labor market. As industries expand or contract production, they must also expand or contract industry employment. Since industries demand different types of skills, shocks to industries will create excess demands for certain skills and excess supplies of other skills that will result in changes in relative wages. Job security is limited in a dynamic economy as workers must leave jobs that are in less demand and move to jobs in greater demand. The “churning” of the U.S. labor market consists of millions of workers changing jobs per quarter. In recent quarters about 7 million workers have left jobs and more than 7 million have taken new jobs. The new jobs may be with different employers, in different cities, and they may be in new occupations. Adaptability is important, and worker response is complicated by the difficulty in knowing whether a job loss in an industry is transitory or permanent.

References

Strazds, Andris, and Thomas Grennes. 2013.” Will the Boom in U.S. Energy Production Bring Back Manufacturing Jobs?” EconoMonitor. March 14.

 

 

 

 

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