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,
% of GDP,
Motor vehicles and parts3.3%3.0%
Furniture and household equipment3.1%2.9%
Residential Investment5.1%3.8%

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

Sector% of GDP,
% of GDP,
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.

Bureau of Economic Analysis, National Economic Accounts


Popular posts from this blog

Brazil - in a bubble or on a roll?

A couple of years ago, no one recognized the real estate bubble even though it was under everyone's nose. Now, analysts and bloggers are seeing bubbles everywhere they look. One of them, they say is in Brazil whose Bovespa stock market index has doubled in the last 12 months. Does the bubble accusation hold water? I don't think so and here are 7 reasons why Brazil is by no means a bubble economy: Exports have held up over the past year thanks to demand from China for Brazil's soya exports and iron ore. This was helped by the the Brazilian government's drive to improve trade links with Asia and Africa. Export diversification, spurred by a more active trade policy and increased focus on "south-south" trade under current president Lula, helped mitigate the decline in demand from OECD (Organization for Economic Co-operation and Development) countries A "sensible" economic framework has been in place since the 1990's. This has included inflation

Thursday Bounce: Trend Busters, Swing Signals and Trend Leaders for July 9, 2009

This is a quick post to announce that we have published Thursday's Trend Leaders, Swing Signals and Trend Busters at Alert HQ . All are based on daily data. Today we have the following: 72 Swing Signals -- A couple of days ago we had 35 signals, today we have twice as many. Happily, we now have 65 BUY signals, a mere 4 SELL Signals plus 3 Strong BUYs. Whoo-hoo! 56 Trend Leaders , all in strong up-trends according to Aroon, MACD and DMI. There are 18 new stocks that made today's list and 60 that fell off Tuesday's list. 48 Trend Busters of which 5 are BUY signals and 43 are SELL signals The view from Alert HQ -- Talk about mixed signals. If you look at our Swing Signals list you would think the market was in the middle of a big bounce. BUY signals are swamping the SELL signals and we even have a few Strong BUYs. Yes, there's a good sprinkling of tech stocks and tech ETFs but the distribution is pretty broad-based with a good number of different sectors represented, eve

Unlock Stock Market Profits - Key #1

This is the first in an ongoing series of articles where I discuss what I feel are keys to successful investing. 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 ) There are two basic steps to investing. First, you need to find stocks that seem to have some potential. Then you have to determine whether these stocks are actually good investments. There are many stocks that at first glance look interesting, but further research reveals that there are too many negatives to warrant taking a position. This first post in the series starts at the beginning: getting good investment ideas. Key #1: If something special is happening to a stock, it will be reflected in some kind of unusual activity in the markets. As individual investors, we will never be the first to know; however, unusual activity can be an early sign that allows us to follow the Wall Street professional