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Recession in US Services Sector ? Determinants of US services consumption. By Orlando Gracia and Jaime Niņo
May 6, 2001

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  • Comment Board
  • In the 1991 recession the US economy touched bottom in the first quarter of 1991 when the GDP decreased 1.3% and manufacturing output shrunk by 5.3% after several months of negative consumption of durables that reached -15% and slow growth of nondurables. However, services consumption that was growing positively albeit slower than in the previous months at the peak of the recession hit bottom in the next quarter when services consumption grew by 0.8%. At that point, the rest of the economy was experiencing a recovery trend. The services sector recovered two quarters after the rest of the economy hit bottom. Services consumption never reached negative growth rates, but the recovery led services consumption to a moderate 3% growth rate. In conclusion, services are a lot more stable than the rest of the economy.


    We ask in this report what variables influence consumption of services to get a better understanding of what to expect in the months ahead for the US services sector. Given that services may not be stored in the way manufactured goods build up inventories, the performance of services consumption influences output with shorter lags. Therefore, the services output is likely to mirror consumption more accurately.

    Personal consumption accounts for roughly two thirds of the US economy and in the last 14 years services accounted on average for 58% of personal consumption. Consumption of services between 1987 and 2000 grew at an average 3.1%, while services output was roughly above that level. Although services consumption was slightly lower than the average growth of aggregate consumption, it was a lot less variable. This is perhaps the most important feature of services consumption. Hence, services consumption is critical to smoothing fluctuations in the manufacturing sector.

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