Nine details about the American service industry

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Nine details about the American service industry

  • News by AUN News correspondent
  • AUN News – ISSN: 2949-8090

Summary: Initial decline in goods expenditure has generally followed a high business cycle, although services spending has not been significantly impacted. By April 2020, accurate services spending had decreased by more than 20% because of the considerable reduction in demand for face-to-face services brought on by pandemic-related health concerns. Spending on leisure and transportation services initially decreased by approximately 60% and 50%, respectively, after the pandemic. In September 2021, spending on food and lodging returned to its pre-pandemic level. Since August 2021, firms that provide food services have routinely reported having the most trouble finding new employees.

All service sectors had record-high job separations between March and April 2020. A hiring boom occurred in May and June of 2020 as a result. The net effect of high quit and hiring rates in the leisure and hospitality sector has been a severe employment shortage. The pandemic has severely impacted the public and private sectors of education and health care. As of August 2022, employment in those sectors was barely below the total pre-pandemic level.

The government sector saw an increase in separations that were less dramatic but far more enduring. The unemployment rate among leisure and hospitality employees was higher than in other eras. Since mid-2021, increasing inflation has reduced the improvements in real wages made during the pandemic’s first year. Real wage growth for private workers across sectors since 2020 has generally been negative. The value of human contact has increased across most industries.

There is an association between the importance of face-to-face encounters and home-based employment. Two-thirds of employment will require soft skills by 2030, increasing the demand for these skills. According to Microsoft’s 2021 Work Trends Index, social interactions spur strategic thinking and innovation. The annualised inflation rate for products (commodities) rose between August 2017-August 2019 and August 2020-August 2022. Food services inflation increased 5.9 percentage points on average across U.S. cities, with costs for food consumed at home increasing more than those at restaurants.

Inflation decreased from about 3.5 percent annually in 2019 to about 2 percent in 2021. The 12-month change in both measures topped 5% as of the summer of 2022. Housing cost inflation contributed nearly two percentage points to the increase in the CPI and PCE.

Fact 1: Recent business cycles have lagged behind the recovery in service demand.

The initial decline in goods expenditure has generally followed a high business cycle, although services spending has not been significantly impacted. In other words, the recent defining feature of a recession was that consumers put off buying products, especially durable ones. Figure 1 illustrates this tendency after the peaks in 1981, 1990, and 2008, although it is less clear during the 2001 slump.

The COVID-19 recession’s spending composition has been very different compared to prior times. Annualized real spending growth in the 14 months preceding the pandemic was 1.9 percent for services and 4.4 percent for goods, roughly in line with previous business cycles. After brief, abrupt drops in both categories of spending in 2020, goods spending soared while services spending stayed significantly below its pre-pandemic peak. In March 2021, spending on goods reached a height that was 20% above its pre-pandemic level. Actual consumption of products has also decreased since the recovery began, which is a year and a half old. This was the point that goods consumption started to increase in previous cycles.

By April 2020, accurate services spending had decreased by more than 20% due to the considerable reduction in demand for face-to-face services brought on by pandemic-related health concerns. Actual service spending has gradually increased since early 2021 and, as of July 2022, is higher than before the pandemic. The share of overall expenditure on services is four percentage points below the norm for the decade before the pandemic, and it is still around 3 percent below its pre-existing trend due to increased spending on products.

Fact 2. The industries with the most significant drops in demand were leisure and hospitality, transportation, and health services.


The decline in consumer spending in early 2020 was most pronounced in the service sector since customers frequently interact in person with businesses in this industry due to health concerns. During the COVID-19 recession, outlined 1, which sectors were responsible for the overall fall in actual consumption of services? Recreation, food and lodging, transportation, and health care significantly contributed to the initial 20 percent fall in the actual consumption of services in April 2020. (figure 2).

In September 2021, spending on food and lodging returned to its pre-pandemic level, with restaurants playing a vital role in the recovery. By July 2022, when spending on housing had only just begun to rise above pre-pandemic levels, actual spending on food services had surpassed pre-pandemic levels by 5%. The amount spent on healthcare services is reaching pre-pandemic levels but has not yet recovered. Many consumers had put off preventative treatment and elective procedures, which was unexpected amid a pandemic.

Spending on leisure and transportation services, which initially decreased by approximately 60% and 50%, respectively, also reflects early pullbacks in expenditures for in-person activities. Throughout 2021, spending in these categories grew gradually before plateauing in the first part of 2022. Actual expenditure on leisure and transportation services was about 10% below pre-pandemic levels in July 2022.

3. In most industries, small businesses said that difficulties acquiring employees were more severe than other obstacles.


The issues that small firms in various industries have reported in the Small Business Pulse Survey conducted by the Census Bureau are significantly different, as seen in Figure 3. Small firms have indicated over the past few years that supply chain and logistical problems, as well as labour shortages, have occasionally impacted them. However, through April 2022, most sectors’ most frequently cited problem was their inability to hire all the needed workers.

Since August 2021, firms that provide food services have routinely reported having the most trouble finding new employees, with 50 to 70 percent stating that there is a problem. About 40% of other industries, such as manufacturing and health care, had problems hiring. According to a National Federation of Independent Businesses (NFIB) poll conducted in July 2022, nearly 50% of small business owners reported having trouble filling job positions, which is around 20% more than the historical norm (Dunkelberg and Wade 2022). The recruiting struggles of firms will probably impede the recovery of the service sector’s generally labour-intensive businesses.

Additionally, many small enterprises mentioned having trouble finding supplies or inputs. This was especially true for small businesses in the manufacturing, construction, and retail sectors, with almost 50% of companies in each industry citing supply and input issues in the Pulse Survey. Additionally, many manufacturing companies suffered delays in product delivery to clients and production. Wholesale distributors experienced delivery delays due to some of those production delays. These problems do not seem to have diminished in recent months. According to the NFIB research from July, 30% of companies said that supply-chain disruptions had a substantial impact on their operations, which is about the same as the national average from the Pulse Survey from April.

Fact 4: In the leisure and hospitality industries, separations and hires are still common.


All service sectors had record-high job separations between March and April 2020, especially in the hospitality and leisure sectors. A hiring boom occurred in May and June of 2020 as a result. With some notable exceptions: leisure and hospitality, where separations and hires both remain elevated, manufacturing (elevated hiring), and construction. Since the first few months of the pandemic, separations and hires in most sectors have remained higher than but closer to their pre-pandemic levels (depressed hiring).

In businesses more likely to demand in-person work, job churn—the combination of separations and hiring—has been highest throughout the pandemic (Stevenson 2021). The net effect of both high quit and high hiring rates in the leisure and hospitality sector has been a severe employment shortage; in August 2022, employment was still 1.2 million below its pre-pandemic level. The most significant gap in any industry is, by far, that one. Job opportunities are still very high despite the recovery in demand for certain services. The number of leisure and hospitality openings has only slightly decreased from nearly 2 million in December 2021 to roughly 1.5 million openings since April of this year.

The public and private sectors of education and health care have also been severely impacted. The combined sectors of education and health care in the private sector experienced a rise in separations of more than 5 percentage points between March and April 2020 compared to their pre-pandemic separation rate. Private education and health service hiring has increased since the summer of 2021; as of August 2022, employment in those sectors was barely below the total pre-pandemic level and far below the past trend. Additionally, as seen in figure 4, companies in the healthcare and education industries reported having a lot of trouble hiring.

Through the fall of 2020, the government sector saw an increase in separations that were less dramatic but far more enduring. This was primarily due to long breaks in the state and local education workforce. Since 2021, the rate of hiring for positions in the government has been erratic but generally higher. However, employment in the public sector was still around 3% below its level in February 2020 in August 2022, with local government educational services making up almost half of that shortfall.

Fact 5: Most people who worked in the leisure and hospitality industries the year before the epidemic was still there the following year.


According to panel data from the Current Population Survey, the majority of people who worked in leisure and hospitality from March 2018 to February 2019 remained employed in that industry the following year, as did those who worked there from March 2019 to February 2020 (the 12 months before the pandemic) or from March 2020 to February 2021. Researchers can follow some respondents over 16 months thanks to the survey. Fifty-seven percent of respondents who said they worked in leisure and hospitality the year before the pandemic continued to do so the following year, compared to 24 percent who worked in another industry, 10 percent who were unemployed, and 9 percent who were no longer in the labour force among those who could be followed over the entire period (shown in middle bar of figure 5).

It is instructive to contrast the time depicted in the centre bar, which displays changes from the year before the pandemic’s commencement to the year after it began, with other eras. The unemployment rate among leisure and hospitality employees was higher compared to the two years before the pandemic (the first bar) and the two years following its start (the last bar). Other changes, however, were strikingly consistent across time. Even more unexpectedly, the share leaving the leisure and hospitality industries is identical among those employed in the second year of the observation period. The constancy is unexpected considering that the 2020–21 era was characterised by increased health hazards, other challenges unique to the leisure and hospitality sector, and high demand from employers in different industries.

Through January 2022, results from a different survey of long-tenured displaced workers indicate that individuals who had worked in the leisure and hospitality sector for three or more years at the same firm experienced less favourable labour market outcomes (BLS 2022c). These long-tenured employees tend to be older and have less common traits in a sector with high employee turnover. Among them, 64% had found new employment, 13% were unemployed, and 22% had quit their jobs.

Fact 6: In 2022, food services and lodging saw the most significant salary increases.


Real pay growth was, on average, positive in every industry from 2014 to 2019 and 2020. In the service industry from 2020 to 2021, real wage growth was marginally positive, driven by increases in leisure and hospitality, retail, and “other services”; in contrast, real wage growth in the products sector during this time was negative. Real wage growth for private workers across industries since 2020 has generally been negative, according to data through the most recent quarter of 2022. (purple bars in figure 6). Since mid-2021, increasing inflation has reduced the improvements in real wages made during the pandemic’s first year.

From 2020 to 2022Q2, two industries—leisure and hospitality (1.3 percent annualised rate) and retail trade—show positive real wage growth (0.6 percent). These advances, however, are less than they were for the 2014–19 period: for those sectors, they are 1.8 percent and 1.6 percent, respectively.

Surprisingly, the pattern of real pay increases seems to have a minimal correlation with the industries that are having trouble hiring or hiring more frequently. On the one hand, the leisure and hospitality industries demonstrate that higher recruiting rates and hiring challenges have been linked to higher pay. Perhaps the high wage increases are to blame for retail companies’ comparatively easy hiring process. However, despite increased hiring and hiring challenges, real pay growth has been sharply negative in the manufacturing sector. Additionally, healthcare businesses express difficulty hiring and exhibit negative real wage growth.

Fact 7. The value of human contact has increased across most industries.


According to O*NET survey results, nearly all occupations have seen a rise in the importance of job duties involving interpersonal relationships during the past ten years. Among these responsibilities are helping or caring for others, resolving disputes, engaging in negotiation with others, and instructing and training others. Indeed, other studies have shown that compared to 1980, service and social tasks in occupations requiring soft or noncognitive skills have dramatically increased, as have critical thinking skills, whereas routine and math tasks have decreased or plateaued (Autor, Levy, and Murnane 2003; Acemoglu and Autor 2011; Deming 2015; Schanzenbach et al. 2016; Atalay et al. 2018; Hershbein and Kahn 2018).

Although occupations traditionally linked with the service sector did not just see increases in the value of interpersonal contacts, these occupations did experience the highest gains. For instance, figure 7 demonstrates that the relevance of such tasks increased significantly in the two fields of healthcare support and food preparation and service. The value of human contact will likely keep rising: According to Deloitte, two-thirds of employment will require soft skills by 2030, increasing the demand for these skills (Deloitte 2019; Cengage 2019). According to Microsoft’s 2021 Work Trends Index, social interactions spur strategic thinking, teamwork, and the development of fresh ideas, which boost productivity and foster creativity (Microsoft 2021).

How will the pandemic-driven rise in remote work and preference interact with the importance of interpersonal tasks? Beyond face-to-face encounters, there is an association between the importance of interpersonal activities and home-based employment. However, the nature of this association varies significantly between occupations (Avdiu and Nayyar, 2020). When professional responsibilities require interpersonal connections, yet more service sector employment is distant, building relationships with clients, customers, and coworkers may appear different.

8. The rate of inflation varies by industry and area.


As consumer purchasing switched away from services and toward goods during the epidemic and the industry was hampered by supply issues, goods inflation shot up in cities across the nation (Stone 2022). The annualised inflation rate for products (commodities) rose between the August 2017-August 2019 and the August 2020-August 2022 periods, as illustrated in the second panel of figure 8. The increases ranged from 7 to 9 percentage points across seven specifically chosen (and usually representative) metropolitan areas; on average, the rate increased by more than eight percentage points throughout American cities, from 1.4 percent to 9.8 percent.

Inflation for services increased on average as well, but the third panel reveals that the increases were less significant than those for commodities and displayed greater regional variance. The cost of services decreased in San Francisco and remained nearly the same in Los Angeles, likely due to declines in the cost of housing, as indicated in the seventh panel. (Fact 9 shows that the Consumer Price Index (CPI) inflation gauge of shelter is sluggish to take up price rises and that, in places that have so far had little inflation in this area, a spike in shelter inflation may be on the horizon.) From 1.3 percentage points in Seattle to 3.3 percentage points in the Miami region, six other metropolitan areas experienced increases in the cost of services.

Food services inflation increased 5.9 percentage points on average across U.S. cities, with costs for food consumed at home increasing more than those at restaurants and other outside establishments. The increases, meanwhile, were very different throughout the locations, ranging from a low of 2.8 percentage points in Miami to a high of 7.4 percentage points in Houston. The inflation rate increases in the leisure sector varied from 0.9 to 8.0 percentage points. Except for Los Angeles, Philadelphia, and Seattle, medical services inflation remained steady or slightly decreased.

9. New leases are driving the increase in housing services.


The housing market’s inflation rate was low at the beginning of the pandemic but has now grown above pre-pandemic levels, according to several indicators of rental pricing (figure 9). The CPI and the Personal Consumption Expenditures Price Index (PCE), which track changes in rent prices for the typical renter, show that inflation decreased from about 3.5 percent annually in 2019 to lows of about 2 percent in the middle of 2021. The 12-month change in both measures topped 5% as of the summer of 2022, indicating that growth has since picked up. Because leases are usually for a year, a sudden increase in rent for new leases only affects average rentals when the new leases are implemented. Because other metrics only reveal price changes for new leases, CPI and PCE housing inflation movements often lag those other indicators (Ambrose, Coulson, and Yoshida 2020).

Most indices suggest that the 12-month change in pricing of new leases was declining during the first year of the pandemic, even for more immediate metrics capturing new leases. Then, in 2021—well before the CPI and PCE measurements started to rise—rates shot through the roof. Despite a recent decline, these new-lease rental inflation estimates remain significantly higher than the PCE and CPI indicators. Rent increases and home price increases are already exerting significant upward pressure on total inflation since housing costs account for a sizable share of spending on services as assessed by the PCE and CPI inflation measures. Housing cost inflation contributed nearly two percentage points to the 8.5 percent annual increase in the CPI and the 6.3 percent annual increase in the PCE in July 2022, respectively (with differences due to methodology and weighting). The measurements shown here indicate that as more recent new leases are added, such contributions will grow in size over the following months.

Not all cities have indeed seen the same variations in rental inflation. According to Apartment List, the cost of renting a home in New York City dropped by 22% between November 2019 and November 2020 before rising by 33% during the following year, which ended in December 2021. In contrast, rental rates in Kansas City, Missouri, climbed by 1% between November 2019 and November 2020 and 9% between December 2020 and December 2021.

Analysis by: Advocacy Unified Network

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