Skip to main content

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 parts3.3%3.0%
Furniture and household equipment3.1%2.9%
Residential Investment5.1%3.8%
Transportation2.6%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
Food9.7%9.7%
Gasoline, fuel oil, and other energy goods2.4%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.

Source:
Bureau of Economic Analysis, National Economic Accounts
(http://www.bea.gov/national/index.htm#gdp)

Comments

Popular posts from this blog

Time to be conservative with your 401K

Most of the posts I and other financial bloggers write are typically focused on individual stocks or ETFs and managing active portfolios. For those folks who are more conservative investors, those whose main investment vehicle is a 401K, for example, the techniques for portfolio management might be a little different. The news of stock markets falling and pundits predicting recession is disconcerting to professional investors as well as to those of us who are watching our balances in an IRA or 401K sag. What approach should the average 401K investor take? Let's assume that the investor is contributing on a regular basis to one of these retirement accounts. There are two questions that the investor needs to ask: 1. Should I stop putting the regular contribution into stocks? My feeling is that investors making regular contributions are being handed a present by the markets. Every week the market goes down, these investors are lowering their average cost. When markets reco...

The Trouble with Trend Reversal Indicators

Many of us use various trend reversal indicators to time our trades. Our desire is to determine when prices have changed direction so that we can ride the new trend. Why doesn't it always work out? The first reason, of course, is that unforeseen events often drive prices in unexpected directions. That is something we can't change and it often makes all of us technical traders crazy. On the other hand, sometimes an unforeseen event is a prelude to a new trend. A stock spikes up on a what seems to be a one-time piece of good fortune and soon falls back. Does it start making its way back up or does it resume a previous down trend? The conflict within trend reversal indicators is that, though they can definitely tell when prices change direction, they suffer from two problems. One, they often can't determine how significant that move in prices actually will be. Two, they are often lagging indicators. As such, they can be late in providing a signal, sometimes leading the investo...

Unlock Stock Market Profits - Key #4

This is the fourth article in a series of posts describing 10 tools to help you identify and evaluate good investing ideas. It is based on a post that provides a summary of the ten keys that individual investors should use to identify profitable stock trades. ( Click here to read the original post ) With this fourth post, we will continue another step along the path of finding stocks that seem to have some potential. The first post in the series discussed how to use unusual activity to identify investing ideas. The second post described how to use stock screeners. The third post described how to use lists of new highs and new lows. This post will focus on identifying social or business trends in order to find investing ideas. Information on new trends might turn up anywhere. In conversation with friends or business associates, in newspapers or magazines, on TV or though your work. The key is to be aware of trends and how they start, stop or change. We'll start by describing what...