The Shape of a Recession
By Carson Gorecki
A new data tool from the Minnesota Department of Employment and Economic Development (DEED) underscores how the pandemic recession is different from recent recessions in a number of important ways and how it has had an unprecedented impact on employment in certain industries.
The current pandemic-induced recession has touched every corner of Minnesota’s economy and labor market in some way. The overall effect includes an unparalleled initial loss of jobs in March and April, followed by a modest recovery through the fall, before jobs started declining again at the end of the year. The dramatic drop, quick recovery and subsequent downturn of the pandemic recession look very different when graphed on a line chart in comparison to the Great Recession and the 2001 recession, all showing change in employment over the year, by month, during each recession. (See Figure 1). Differences between recessions in key industries and sectors also become evident through this analysis.
The industries that were hit hardest by job loss in that last two recessions – such as Manufacturing, Construction and Retail Trade – are faring relatively better in the current COVID-19 economic crisis. Contrarily, industries such as Health Care & Social Assistance and Leisure & Hospitality, which were more resistant to employment loss in previous downturns, have shown much worse outcomes this year. This stark upending of what could be described as typical recessionary employment trends highlights the singular moment the Minnesota economy is currently in.
To help put the current situation into context, a new tool on DEED’s website provides a visual comparison of COVID-19 employment trends to those over the past two recessions, in 2001-2004 and 2008-2010. The Comparing Recessions tool aligns each recession by its first month in order to compare over-the-year (OTY) employment change trends by industry over each recession’s term. Through December, we were 10 months into the current recession, which is about one-third the length of the Great Recession, which ran from 2008 to 2010. During the Great Recession, the state didn’t break even on jobs lost from 2007 until 2013, though year-over-year employment expansions began in 2010.
Since we’re not even a year into the pandemic recession, and the coronavirus is still wreaking havoc on our economy, we can’t say what the path of the recovery will look like over time. But is important to note that the scope of the job loss in this recession was staggering – falling 12.9% through April, and still down -8.3% through December; but the initial recovery was also much faster. Much will be learned by how different industries respond in different ways to the current conditions. While the past recessions provide useful context it’s clear that our current pandemic is different than others. The industries exhibiting the largest deviations this pandemic versus the two most recent previous recessions are highlighted below.
Construction is one of the major component industries of the Goods-Producing supersector, accounting for 4.2% of all Minnesota jobs, according to DEED’s Current Employment Statistics. The industry experienced OTY employment losses throughout 2020, ending the year down 3.9% (see Figure 2). Yet when compared to the Great Recession, the industry has fared well so far. Seasonally-adjusted employment losses bottomed out at -8.3% five months into the current recession, which was less than the average for the employment loss of all industries.
By contrast, Construction was one of the defining industries of the Great Recession – losing more jobs by percentage than most other industries. Construction started declining as early as 2006, a bellwether for worse things to come; and fueled by the combined collapses of the housing and financial markets, there were 18 months with severe OTY employment losses in Construction during the Great Recession. The housing market also played a role leading up to the 2001 downturn, yet Construction employment was relatively unaffected at that time.
Part of why Construction employment has not been as impacted so far in the current recession has to do with the initial cause of the downturn as well as the nature of typical Construction work. The Great Recession was precipitated by a collapse of the housing market, which is tied directly to demand for Construction – particularly Residential Construction. By contrast, demand for housing has remained high so far through 2020, and the residential market remains strong. Additionally, Construction work is often done outside, and workers are typically able to space themselves, lowering the risk of virus transmission. For this reason, restrictions that were imposed to stem the spread of COVID-19 did not have a large impact on Construction activities, which were deemed a part of critical infrastructure.
Heavy and Civil Engineering Construction, which typically consists of work on larger, more long-term projects such as roads and bridges, has also weathered the pandemic much better than most industries, even ending the year 9.4% higher than 2019 employment levels. Construction of Buildings ended 2020 down 8.6%, suggesting it may have been more sensitive to overall economic fluctuation, even if there was no housing market crash.
Research by the Federal Reserve Bank of St. Louis indicates that Construction – due to its strong connections with other sectors – can be defined as a “hub” industry. Industries that buy or sell goods and services from the Construction industry were much more likely to see their output fall during the Great Recession. The fact that Construction has fared relatively better thus far in the current recession could indicate additional insulation for tightly-linked industries such as Manufacturing, Financial Activities, Wholesale Trade and Retail Trade. In fact, each of these industries has seen job losses well below the state average.
Manufacturing is performing much better than many other industries, especially in comparison to previous downturns. Manufacturing employment has been on a general decline in Minnesota since 2000, accelerating during the recessions of 2001 and 2008. Nationwide, Manufacturing was one of the hardest-hit industries during and between the last two recessions. In Minnesota, since nearing a high of 400,000 jobs in mid-2000, Manufacturing fell below 300,000 by the end of the Great Recession. Of the nearly 34,000 jobs that were added back by 2020, 64% were lost again between March and April of 2020. That initial decline may have been steeper than the more gradual losses seen in 2001 and 2008-2009, but the low point of OTY employment loss was less severe, and jobs have recovered more quickly during the pandemic recession (see Figure 3).
Despite its name, the smaller Non-Durable Goods Manufacturing industry has proven more durable through the current and previous two recessions, seeing smaller OTY employment losses. Food Manufacturing has fared especially well, finishing 2020 with five months of year-over-year growth, likely spurred by demand from more people eating at home, and buying food from grocery stores instead of at restaurants. This is despite the Animal Slaughtering and Processing subsector ending the year down -3.6% - likely reflecting temporary job losses due to numerous outbreaks at facilities across the state. Non-Durable Goods Manufacturing ended the year at -0.2% OTY, despite the recession.
The larger Durable Goods Manufacturing industry represents 7% of Minnesota’s employment and ended 2020 down -5.1%. Within that industry, Fabricated Metal Product Manufacturing ended the year on a downward trajectory and Miscellaneous Manufacturing finished 2020 down -6% OTY. Transportation Equipment, Computer and Electronic Products, Machinery, and Wood Product Manufacturing all fared better throughout 2020 than the Durable Goods Manufacturing average, but were still down overall.
Some manufacturers were insulated from initial negative effects because they were deemed critical infrastructure. Many manufacturers adapted quickly to adhere to social distancing and other safety regulations aimed at preventing the spread of COVID-19, including using more spacious facilities and requiring office staff to work at home. Additionally, while typical demand for some products lagged, some manufacturers were able to pivot production to help meet spiking demand for other products such as personal protective equipment and sanitary supplies, keeping workers employed.
Health Care & Social Assistance
Health Care & Social Assistance – which employs one in every six workers in the state, making it the largest industry by employment in Minnesota – is at the heart of the fight against the COVID-19 pandemic. However, even this most critical group of workers saw employment losses during the recession. Initial job cuts in April of 2020 neared 45,000, erasing almost seven years of industry growth. However, the rate of employment recovery since that point has been consistent. At the end of 2020, job losses were about half that of the average of all industries, -4.1% compared to -8.0%.
Prior to the COVID-19 crisis, Health Care & Social Assistance was one of the strongest performing industries in and out of economic downturns. In fact, Health Care & Social Assistance was one of very few industries that sustained positive OTY growth over the entirety of the previous two recessions (see Figure 4). However, even an industry that many people previously considered “recession-resistant” suffered under the unique circumstances of the COVID-19 crisis. Those circumstances included a temporary pause on elective surgeries and procedures that was implemented as part of the initial state stay-at-home order in mid-March. Since that order was lifted, Health Care has added jobs in every month except October, regaining 65% of the jobs lost in April.
The initial pause of elective procedures meant the temporary loss of a significant source of revenue for many Health Care employers. However, critical services continued throughout the pandemic, buoying employment levels, particularly in Hospitals. Within Health Care & Social Assistance, Hospitals, which typically provides more immediately necessary inpatient care, saw initial employment losses (-5.4%) that were less than outpatient-focused Ambulatory Healthcare Services (-16.7%), Nursing and Residential Care Facilities (-6.9%), and Social Assistance (-16.7%). Hospitals also ended 2020 with OTY employment down just -2.3%, less than half the losses of other Health Care & Social Assistance industries.
Leisure & Hospitality
Of all sectors, employment losses during the current downturn have been the greatest in Leisure & Hospitality. Before the turn of the century, Leisure & Hospitality employment appeared to be somewhat protected from recessionary effects. The national average of Leisure & Hospitality employment from 1948 through 2001 saw the industry finish recessions at least 5% higher than where they began as consumer confidence always returned. That trend appears to have reversed with the Great Recession and the current downturn. The Great Recession saw consistent OTY Leisure & Hospitality employment declines in Minnesota, bottoming out 14 months in at -3.8%. Negative OTY employment change in the sector lasted for 25 months. Until last year, the depth of the employment losses in Leisure & Hospitality during the Great Recession had no comparison.
Then this March, seemingly overnight, more than half of Minnesota’s Leisure & Hospitality jobs were lost, dwarfing what were once considered severe employment declines ten years earlier. The magnitude of the employment losses is immediately clear. Once the initial shutdown lifted, Leisure & Hospitality jobs rebounded significantly through the summer, before stalling out in the fall, and then eventually ending the year -43.9% lower than December 2019 (see Figure 5). A temporary shutdown of bars, restaurants, and other entertainment venues beginning at the end of November likely added to usual seasonal declines.
The Leisure & Hospitality supersector consists of the Accommodation & Food Services and Arts, Entertainment & Recreation industries. The smaller Arts, Entertainment, & Recreation industry experienced the greatest OTY employment losses in the supersector, hitting -60% in April and finishing the year down -43.2%. Accommodation & Food Services initially saw April employment down -53.7% OTY before climbing and falling again to finish the year -40.5% off of December 2019 levels.
There are many reasons why Leisure & Hospitality has fared so much worse than other industry sectors. Leisure & Hospitality industries depend on the congregation of individuals, be it at concerts, in bars and restaurants or at special events. As we have learned, crowds – particularly indoors – greatly increase the risk of virus transmission. Restrictions on indoor drinking and dining, including some temporary closures of in-person service, were aimed at lowering the rate of spread. Unfortunately, these life-saving measures have also placed enormous stress on Leisure & Hospitality businesses, many of which have had to lay off employees, either temporarily or permanently. In no other recession was a single sector so exposed to – and also a driver of – recessionary impacts. However, unlike Construction or Manufacturing during the Great Recession, the shock in Leisure & Hospitality has seemingly not spilled over into other industries.
Of all industries, the path of Retail Trade employment through the current recession has been perhaps the most surprising. After initially declining slightly less than the total of all industries in April, OTY employment recovered much more rapidly than all other major industries, even reaching -0.9% OTY change by June (see Figure 6). From there, as consumers adapted to new buying patterns, it was one of only three industries to achieve pre-pandemic employment levels at any point in 2020, and did so as soon as August. Retail Trade’s performance helped to buoy the larger Trade, Transportation & Utilities sector, which ended the year off only -1.8%. Despite losses at the end of 2020, Retail Trade employment finished the year at virtually the same number of jobs as it began the year. This was a truly rare feat in what was a bleak year for customer-facing workers, especially in what is traditionally a customer-facing industry.
The performance of Retail Trade employment during the COVID-19 crisis is even more surprising when you compare it to the industry’s trends during previous recessions. According to the U.S. Bureau of Labor Statistics, the national Retail Trade industry lost jobs in each of the five previous recessions – and saw the most severe declines during the Great Recession. In Minnesota, the industry lost 7,400 jobs in the 2001 recession. Retail Trade fared even worse during the Great Recession, with OTY employment losses in every month of the 2008-2010 downturn. In fact, the maximum OTY loss of -5.9% in 2009 was greater than the overall bottom of -5.1% across all industries.
As described briefly above, driving the stronger Retail Trade employment trends during 2020 were Food and Beverage Stores and General Merchandise Stores. Grocery stores likely benefited from restrictions on in-person dining that led to more people cooking and eating meals at home. Internet shopping and online sales have also boomed for those businesses well-positioned to take advantage.
However, the trends in Retail are not all rosy. Employment losses during the typically busy holiday season have injected additional uncertainty as we head into 2021. Additionally, not all retailers entered the economic crisis on the same footing. Smaller retailers tend to have fewer resources to comply with changing restrictions and take advantage of increased online commerce.
Other Industries with Notable Differences
Other Services employment, like Leisure & Hospitality, has fared much worse during the current recession than the two previous recessions. Personal and Laundry Services bottomed out initially at -64.4% OTY and recovered only to -32.5% OTY by December 2020, the third-worst loss of all industries. Additional subsectors including Repair and Maintenance and Religious, Grantmaking, Civic, Professional and Similar Organizations saw relatively milder employment losses, ending the year at -2.7% and -8.5% OTY respectively. Other Services, which are tied to many other industries such as Construction, saw delayed – and much milder – negative employment effects in 2001-2004 and 2008-2010.
From 1939 until the Great Recession, the only downturn where the Financial Activities sector saw a decline was in 1990-1991. The closely tied housing market and financial crises of the mid-2000s precipitated the Great Recession and affected employment in the sector itself, which saw job losses begin in 2006 and continue into mid-2010. Despite the sector’s central role in the last recession, peak job losses were relatively minor compared to Construction and Manufacturing, falling 7.5% from peak to trough.
Without any corresponding market crashes, in 2020 the Finance and Insurance industry was relatively unaffected, falling only -1.3% at worst and ending the year with positive OTY employment. By comparison, the Real Estate, Rental and Leasing industry has fared worse in all three downturns, most clearly in 2020 when OTY employment hit an initial low of -17.5% in June before rebounding to -7.2% in December. Even with this recovery, OTY Real Estate employment remained below the worst point of the Great Recession (-5.7%).
Information employment, which includes broadcasting, publishing and website operation, has been falling in Minnesota since January 2001. This trend of decline accelerated during each of the three recessions. In the 2001-2004 and 2008-2010 recessions OTY employment reached as low as -8.6% and -4.9%. The trend of decline increased in magnitude last year when OTY employment fell -15.3%, and instead of recovering like most other industries, finished the year even lower at -15.6% OTY. Of the 70 months combined across the three recessions, none had positive OTY employment change in the Information industry.
Over-the-year Government employment has fared much worse in the current recession, initially falling to -9.9% in May and ending the year down -8.5%. While fluctuating considerably, OTY Government employment only fell as low as -2.4% in either of the previous recessions. Driving these declines in 2020 were losses in Local Government that brought employment to levels not seen since 1993. Over-the-year Local Government employment bottomed out at -13.1% and finished the year off -10%. State Government declined gradually throughout 2020, ending down -7.5% OTY. Federal Government employment in Minnesota grew throughout 2020, likely buoyed by hiring of workers for the 2020 U.S. Census.
While the COVID-19 pandemic turned every-day life upside down, it also flipped the script of which industries and sectors were most impacted, compared to recent recessions. Recessions in 2001-2004 and 2008-2010 saw larger employment losses in Goods-Producing industries such as Construction and Manufacturing while Service-Providing industries such as Health Care & Social Assistance and Accommodation & Food Services were more insulated. That has decidedly not been the experience of those industry sectors so far in the pandemic recession. Meanwhile, in the past two recessions, Retail Trade saw consistent employment declines that were slightly larger than average, but that sector has fared well during this downturn.
Trends from previous recessions could not predict the employment impacts of the current downturn. An economic crisis spurred by the onset of COVID-19 left some industries much more susceptible to employment decline than they would’ve been without a public health crisis. Non-essential industries dependent on physical and social interaction such as Leisure & Hospitality suffered the most. Even the essential Health Care & Social Assistance industry experienced OTY job losses for the first time at any point in the past three recessions. Meanwhile, typical recessionary industries such as Manufacturing and Construction were more suited to adapt to public health restrictions and sustained less severe impacts. Retail Trade also recovered more quickly, partially due to swift adaptation of segments to new consumer trends.
We entered 2021 still mired in the uncertainty of a once-in-a-lifetime economic crisis that has been hard to predict based on past recessions. DEED’s Comparing Recessions tool will continue to document how our current downturn is different and track the course of our recovery in comparison to past rebounds.