© 2000 John Petroff
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© 2000 John Petroff |
Most service and utility industries should not be affected by the business cycle much at all. There is a need for haircuts, child care, water and electricity no matter if there is a little or plenty of income for the household. The pattern of services has changed over the past fifty years. From 25% of gross domestic product, services have grown to over 50%. This implies that most of the economic activity is determined by the service sector. Yet, services demonstrate that they are less cyclical than other sectors.
Graph G-1417 below presents the annual rate of change of business professional services compared to annual change of net domestic product.
Graph G-14.17 shows that business services are virtually oblivious to economic conditions (an OLS regression gives an R2 of 0.02), and bounce in all directions. Such instability is not observed in services offered to households as may be viewed in medical care in Graph G-14.15. One may also note the decreasing growth rate of the medical care sector in the recent past.
It would be reasonable to assume that services should not be more correlated with the business cycle today than in the past. Actually, that is not the case. The reason for this is that services now represent three quarters of overall economic activity; therefore, other sectors have less influence that services. Another argument is that many activities that were performed within a household, and are now part of services, such as food delivery service or laundering, are likely to be more income sensitive than more traditional services such as haircuts. This newly cyclical component of services accentuates the business cycle, and naturally is closely correlated to it.
See review questions Q-14D5.1 through Q-14D5.3.
See research assignment R-14D5.1
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