The Corner

Economy & Business

The First Services Recession

This is for your consideration. Gabriel Mathy, an economist at American University, wrote a brief paper on the current economic situation, which he sees as possibly America’s first-ever services recession, and why a recession that begins in the service sector may be a particularly difficult one.

Services make up a bit less than half of the economy now, as we can see in the above figure. In general services go up as a share of the economy in recessions . . . as other parts of the economy shrink faster. Services, by their very nature, largely involve human interaction. In a pandemic, unlike in other recessions, that will mean sales in the service sector will collapse due to social distancing. Unlike with goods, the output of the service sector cannot be stored. That means that layoffs will have to start very soon as businesses adjust their employment downward. While people’s hair will continue to grow, we may see many bankruptcies among barbershops and hairdresses [sic] as people cut their own hair to avoid infection. This is very different than what we see in basically any recession in modern experience.

He has made his short paper available for download here.

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