– by a New Deal Democrat
No big new economic news today, so let’s take a deeper look at some of the information from Friday’s employment report. Today I will focus on the division between goods and services.
As I have written many times in the past, consumption leads to employment. I usually show this through actual retail sales. The variation I’ll use today uses real personal spending on goods versus services and how consumption leads to employment for each.
As a refresher, here’s the annualized real personal spending on goods (blue) versus services (red), before the pandemic:
Note that the cost of goods is much more volatile than the cost of services (I actually divided the result for goods by 1.5 so that the costs of services don’t just show up as spins). Crucially, year-over-year declines generally coincide with the onset of recessions, while service spending growth generally simply slows. Also, while the two moved coincidentally from 1960-90, since then the cost of goods has generally led the cost of services to some extent.
Here’s the same post-pandemic information (minus the year of massive distortions):
Spending on goods did fall below zero for most of 2022 and is now slightly above zero on a year-over-year basis, while spending on services is much higher.
Now let’s compare real spending on goods (blue) to employment in the goods sector (red) on a year-over-year basis, before the pandemic:
With two exceptions (mid-1980s and late 1990s), consumption of goods leads to employment of goods. Note that this is true even though, due to globalization and offshoring, employment in goods has never increased as much as consumption of goods since the 1980s.
The same leading/lagging relationship applies to service consumption (blue) versus service employment (red):
Now let’s look at each post-pandemic. First, here’s consumption of goods versus employment:
Commodity spending recently peaked on an annualized basis in the summer of 2021, while as we should expect based on past history, commodity employment did not peak until spring 2022. Commodity spending recovered somewhat as with purchasing power increasing as gasoline prices fall from $5 to $3/gallon in late 2022. Merchandise employment is still down and has grown just 0.3% since February, or roughly a 1% annual rate.
Here is service consumption versus employment:
Both consumption and employment in the services sector are much stronger than in the goods sector, and while both are slowing after the stimulus wave in spring 2021, consumption is slowing faster than at the end of 2021
With gasoline prices fairly stable this year, the headwinds for commodity costs are diminishing. I expect goods spending to slow further on a year-over-year basis and likely turn negative again as goods employment follows suit. My best guess is that it will happen by the end of this year, possibly sooner.
Historically, the slowdown in both consumption and employment in the goods sector is likely to be slower, but will follow goods spending and employment with lower growth, if not outright decline.