Since early 2020, there have been extraordinary disruptions across all sectors of the economy. This set of nine economic facts about the service sector in the United States illustrates recent trends in spending, employment, and inflation as the country continues to rebalance. We find that the effects of the pandemic linger: only in recent months has activity in the service sector recovered to pre-pandemic levels. Nonetheless, activity is still well below where it was expected to be in the absence of the pandemic, and further recovery is expected.
Recent changes in real services and goods spending have been extraordinary (figure A). With the onset of the pandemic, real spending on services shrunk by 20 percent between February and April 2020. Spending partly bounced back in the third quarter, with consumption of services in September just 8 percent below pre-pandemic levels. Since the fourth quarter of 2020, spending on services has grown 1.7 percent each quarter, on average. Nonetheless, a simple extrapolation of the pre-pandemic trend in services spending shows that it is still well below trend. In contrast, spending on consumer goods soared after a brief contraction. Since June 2020, real spending on goods has been well above trend—as high as 15 percent in March 2021, relative to the trend from 2018 to 2019. More recently, spending on goods has come down—to 6 percent above trend in July 2022—as consumers have rebalanced the composition of spending closer to historical patterns. The combination of rising spending on services, spurred by pent-up demand and strong household finances, and firms facing challenges in increasing hiring has meant upward pressure on wages and prices.
Today, four out of five American workers in the private sector are employed in the service economy, doing everything from delivering care in hospitals and nursing homes to making and serving food to ensuring products make it from ports to store shelves and into consumers’ hands. Since 2020, changes in employment in the services and goods sectors (figure B) have moved more similarly than have changes in spending in these sectors. Early in 2020, employment in the services sector fell 17 percent, while employment in the goods sector fell only modestly less, by 12 percent. And employment has only just recovered to pre-pandemic levels in recent months. To be sure, the decline in services employment was far larger than in the goods sector, but that mostly reflected that the service sector has grown to be much larger. Goods sector employment peaked at 25 million in 1979. In that year, service-sector employment was already higher at 49 million; since then, it has grown to be 109 million.
After withstanding a seismic and unprecedented shock in early 2020, spending and employment in the service sector has continued to recover, and further recovery is expected. It took until the spring of 2022 for the service sector to recover to pre-pandemic levels in both real spending and employment. In addition, the onset and aftermath of the COVID-19 pandemic has highlighted disparities in jobs throughout the service sector: some face-to-face service workers faced poor working conditions in jobs with little room for advancement, while other workers in certain professional services were afforded new flexibility, like working remotely. Trends in employment growth may follow; as we show in these facts, employment in leisure and hospitality has lagged other sectors, including professional services.
For decades the service sector has driven the economy and the recent rebound in the service sector continues to drive economic growth. What role is there for policy in sustaining this growth? The Hamilton Project has published a policy proposal by Dani Rodrik (Harvard University) that lays out how a modern industrial policy framework should create more “good jobs” by improving productivity and labor income growth for service-sector workers (Rodrik 2022). Is there a role for industrial policy to help create a more resilient, productive economy? And can this industrial policy focus not only on manufacturing but also on the service sector and service-sector workers? The proposal argues that the answer to both questions is yes.
This set of economic facts about the service sector in the United States explores how the service-sector recovery has differed from prior business cycles (fact 1 and fact 2); how spending, employment, wages, and the nature of work in different industries within the service sector are changing (fact 3, fact 4, fact 5, fact 6, and fact 7); and the trajectory of inflation (fact 8 and fact 9).
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