How Vulnerable Is the Economy to Individual Industry Sectors?

I recently wrote a post where I offered that the economy was seeing bear markets in certain specific industries. I mentioned the airline industry, homebuilding and financials and that it seemed that the other sectors of the economy were in OK shape.

In thinking about this I began to wonder how much impact the industries in bear markets would have on the economy as a whole. As a way to begin to gain some insight on this, I looked at the details of the government's Gross Domestic Product report. The GDP report provides a number of data tables that break down the headline number into various components.

Unfortunately, the numbers provided are not quite specific enough to zero in on airlines, for example or even financials. Still, it has been a useful exercise.

The approach I took was to look at two aspects of the issue. First, what percent of GDP a particular industry represented. Secondly, how had that percentage changed from a year ago.

In the first quarters of 2007 and 2008, we had the following results for industries that are in trouble:

Sector	% of GDP, 1Q-2007	% of GDP, 1Q-2008
Motor vehicles and parts	3.3%	3.0%
Furniture and household equipment	3.1%	2.9%
Residential Investment	5.1%	3.8%
Transportation	2.6%	2.6%

In the following table, we show some sectors that are thought to be causing consumers pain:

Sector	% of GDP, 1Q-2007	% of GDP, 1Q-2008
Food	9.7%	9.7%
Gasoline, fuel oil, and other energy goods	2.4%	3.0%

It's true that I'm no economist, but what I think can be derived from these tables is that the U.S. economy is so huge and complicated that problems that are isolated to a few sectors may not actually tip the economy as a whole into a severe recession. As can be seen in the tables above, no one sector comprises more than a few percent of GDP.

The auto industry is clearly in trouble and as a percentage of GDP we see it has fallen about 9% (from 3.3% to 3.0%) over the last 12 months. Nevertheless, as only about 3% of GDP, this sector cannot alone be considered the driver of a recession.

We see a similar situation with Residential Investment. It has dropped 25% but it was only 5.1% of GDP to start with.

There are areas where inflation may be causing price increases that may force certain sectors to become larger as a percentage of GDP. Food, for example, is a large component at 9.7% but it is holding steady. Gas and fuel are obviously climbing, registering a 25% increase, but as a percent of GDP are still in low single digits.

The conclusion I draw from this is two-fold. First, if we see enough industry sectors decline, we will indeed see a meaningful drop in GDP that would lead to recession. Secondly, if some sectors decline but most stay steady, as we are seeing in the most recent GDP report, there is a good chance we will avoid recession or perhaps only experience a mild recession.

Comments

[billddrummer]

This is interesting. If you break the economy down by sectors, no sector dominates. What would be equally as instructive, in my view, would be to look at 'complementary' sectors that are linked to primary sectors: For example, residential investment is linked to building materials sales, furniture, appliances, carpeting, contracting, landscaping and related services, discretionary home furnishings (nondurables such as linens and bedding), and the like. It would be instructive to see what the ripple effect of a drop in a primary industry group does to its complementary groups.

But you make an excellent point: The U.S. economy is so broad, so complex, and so diverse, that a nationwide recession is less likely now than ever. What's more likely is localized recessions (or depressions) driven by local economic conditions.