This Recession is Different

In every recession, goods get hit harder than services. This makes sense. You delay that new appliance purchase, but you continue to go to the gym.

This recession is different. People who could afford to bought Pelotons and canceled their gym membership. This type of thing is playing out in different areas of the economy.

The chief economist at Indeed, Jed Kolko, wrote an excellent piece on the 2020 labor market and the outlook for 2021. He shared this chart, which shows the outlier that is 2020.

Line graph showing recession caused by pandemic is different as services fell more

Kolko breaks down the job market into four different cohorts. The winners, think construction and warehouses, rebounders, like restaurants and dentists, damaged industries like travel and tourism, and finally, paused areas, like professional services. There is an interesting phenomenon happening in this last group, which I wrote about a few weeks ago.

Kolko describes what’s happening here, writing:

These are higher-wage areas of the economy where people can work from home, like tech, finance, and other professional services. Job losses have been relatively modest in these sectors, but job postings have fallen significantly, signaling little firing, but little hiring in them. Because these are well-paid industries, it’s more expensive for employers to find, hire, and train workers. That makes employers more likely to hold onto staff until the economy turns around. In contrast, a restaurant is more likely to lay off people and quickly rehire if business picks up.

These paused sectors explain a paradox in the labor market. Since February, employment has fallen more in lower-wage industries than in higher-wage ones, yet job postings on Indeed are down more in higher-wage jobs. Many lower-wage jobs are in rebounding sectors, which are quicker to fire and hire as demand shifts. Higher-wage jobs are more likely to be in the paused sectors. These weren’t hit as hard by the pandemic, but they have taken a defensive, wait-and-see approach to hiring. In this way, job postings and hiring in these higher-wage sectors are a helpful indicator of longer-term economic confidence.

This virus has flipped a lot of what we know about economics on its head. It also reinforced evergreen things we already knew to be true. For example, it doesn’t matter how much money you make, it matters how much money you save. Somebody who earns $50,000 a year might be in a better position to ride out a recession than somebody who earns $100,000 if the former lives below their means and the latter lives within their means.

If you’re young and you want to form a good foundation, or you’re not so young and need to start now, I highly recommend Ben’s new book. His 20 rules of personal finance is a great place to start.

Source:

2020 US Labor Market Review and 2021 Outlook: Better Than Feared, but Plenty of Damage Remains

 

(Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. For additional advertisement disclaimers click here.)