Industries Susceptible to Recession

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Industries Susceptible to Recession

Since 1980 the US has experienced four recessions, with an average duration of 12.5 months. While historical data and trends are useful in predicting the industries that are most susceptible to a recession, they cannot be used in isolation. This is because the world is constantly changing and evolving due to new technologies and developments. The reasons for the recession are often key in determining the most susceptible industries. A trade war, such as that predicted, would make export-driven industries especially vulnerable, while a recession caused by internal factors is likely to impact more directly on those industries that are domestically orientated. After reviewing the historical data, changes to industrial practices, and future predictions, the financial, construction, travel and hospitality, manufacturing, and automotive industries have been determined as the industries that are most susceptible to recession.

Financial

  • Based on an analysis of the four recessions in the US since 1980, the financial industry is likely to be the industry most severely impacted in a recession. This is supported by data from the S&P 500 that has been analyzed by industry (or sector). In the recession between 2007 and 2009, the financial sector experienced a fall of 250.2 points or 60.89% on the S&P Index. This was 15% more than the next most affected sector.
  • Often the reason for the recession contributes to the most affected industries, and admittedly the 2007 mortgage crisis contributed heavily to the last recession, so it is perhaps not surprising the financial sector was most affected. Even factoring this into the equation, the financial industry has historically been among those most impacted by a recession.
  • One of the main reasons that the financial industry is susceptible to recession is the credit losses, loss in value of investments, and reduction in new business revenues, which go with a recession cut to the heart of their business. Traditionally the impact was felt primarily by banks, but with the diversification of the industry, more financial institutions are likely to be impacted in the future. Unfortunately, this results in a reduction in credit availability, further worsening the recession due to what is known as the financial accelerator effect.
  • New liquidity standards and higher capital requirements were implemented following the last US recession, so it is hoped that this will limit the impact of future recessions on the financial sector. However, although the changes will provide greater reassurances for the financial industry, it will still adjust lending to stay above the minimum requirements and to maintain a capital conservation buffer.
  • Employment is a good indicator of an industry affected by recession. While total employment in the financial industry fell only 8% over the course of the 2007 recession, the number of job openings in the sector fell 55%. Even as the economy regained momentum, the number of job openings remained around 80% of pre-recession levels for some time.

Construction

  • Construction is historically an industry hit hard by recessions. The number of new projects falls and construction on existing products typically slows or grinds to a halt, as the investment capital required to finance the projects becomes harder to find.
  • Employment in the construction industry fell by over 25% during the 2007 recession in the US. This is in contrast to the job losses of 6% experienced by the economy as a whole. The number of construction job openings in 2009 were down 20% from the 2007 levels.
  • The effects of a recession on the construction industry can be illustrated by an analysis of the industry following the 2007 recession. In 2014, some seven years after the start of the 2007 recession, the monthly valuation of all construction projects in place was still only 80% of pre-recession values.
  • The value of residential construction was $466 billion, down from the 2006 pre-recession value of $961 billion, a more than 50% fall. Typically, the recovery in this area of the industry is slow following a recession. While other industries may experience growth soon after a recession, it usually takes the construction industry some time to bounce back.
  • An often forgotten impact is that in times of recession, public funding is often cut. A significant portion of the construction industries' work comes from publicly funded projects. When sectors like health and education receive less funding, the money must be put into essential services first, so renovations and new projects, which benefit the construction industry are halted.

Travel & Hospitality

  • Unfortunately, travel is one of the first things that consumers cut back on in the face of a recession. Throughout the 2009 recession, hotels experienced a sharp decline in bookings. This is indicative of historical trends. Typically, in times of recession, consumers take fewer vacations, and business travelers are more likely to stay in cheaper accommodation for shorter periods.
  • With the threat of a recession already on the cards, businesses are reducing their travel budgets, and business travel plans have been scaled back for the next year. If the impact of any economic downturn is significant, the travel industry typically looks at raising prices, and already there has been a 1-3% increase in airfares.
  • The impact of any recession is that consumers reduce their discretionary spending. Vacations are either scaled back or canceled altogether.
  • If an investor had brought stocks in a travel company at the start of the 2007 recession, they would have lost more than half of their investment by 2009, due to the impact of the recession on the industry. Airline stocks fell 68% and cruise, hotel, and resort stocks 74%.
  • Consumers are more likely to eat at home during a recession to minimize expenditure. This directly impacts the hospitality industry with a significant downturn in both patronage and expenditure. On the flip side, traditional grocery stores often experience an upturn in patronage during a recession because of this phenomenon.
  • What is unique about the travel and hospitality industry is that the causes of the recession are mostly irrelevant, but the effect is always a significant downturn in business. It is of note that the decline in spending is mostly in relation to the larger cities, often smaller, more rural providers are impacted less.

Manufacturing

  • Data based on an analysis of the S&P Index following the 2007 recession, identified the industrial sector as being the second most affected sector. A significant portion of the industrial sector is made up of the manufacturing industry. Over the course of the 2007 recession, the industrial sector experienced a fall of 162.25 points or 45.89%, second only to the financial sector.
  • More than 2 million jobs were lost in the manufacturing industry during the 2007 recession. Job losses are indicative of an industry hit hard by a recession. Historically period of economic downtown results in reduced demand for manufactured goods. This results in a decrease in production or manufacturing levels, which leads to a need by manufacturers to reduce costs. Against that background, job losses are somewhat of an inevitability.
  • For many manufacturing companies, the impact of a recession on them is the result of a domino effect. Take, for example, cement and concrete manufacturing, as the construction industry slows due to the economic downturn, it flows on to the cement and concrete manufacturers due to the reduced demand for their products.
  • With a recession, the demand for manufactured products decreases, which results in a downturn in profits and sales revenue. As a result, manufacturers reduce jobs, stop buying new equipment, reduce research and development, and stop purchasing new equipment. All of these factors have a flow-on effect to other sectors of the economy.

Automotive

  • The current diplomatic impasse between the US and China has escalated. Should the US enter a recession within the next two years, then a trade war with China will be the most likely reason. If this is the case, then industries that rely heavily on exports will be among those most affected. The US automotive industry falls into this category.
  • When the country falls into recession, automakers and auto part makers feel the effect of dropping sales as consumers can no longer afford to purchase new vehicles. In 2008, amid the recession, American stalwart General Motors was pushed to the brink of bankruptcy, because of the impact of falling sales.
  • During the recession in 2007, more than 20,000 auto workers lost their jobs, amounting to a 13.9% reduction in the total numbers of workers in the industry.
  • Following the 2007 recession, the total size of the automotive industry had declined so much that it was almost the same size as General Motors was 30 years ago.
  • A recession at the current time would have a more significant impact on the automotive industry than other industries because many automotive manufacturers are already struggling to deal with the effects of carbon emission regulations.
  • The labor and overhead costs of producing an automobile are relatively constant regardless of the type or model. On average, pickup trucks contribute the most to their profits. When there is a recession, the average person is the first to reduce their spending, which often means a decline in the sales of pickups. Because pickups have a higher contribution to profit margins compared to other vehicles, this sees the profits of the automotive manufacturers fall substantially.

Research Strategy

We reviewed a range of historical data, media articles, and industry analysis reports to determine the industries that are most susceptible to recession. Once we had identified a variety of industries that are susceptible to a recession, we reviewed a range of metrics to determine the impact that previous recessions had on each of them. Most of the available data related to the 2007 recession, so we used this as a baseline. By doing this, we were able to identify the most susceptible industries. Due to the research requiring an analysis of historical data, several of the articles we have relied on fall outside of the two-year period, we would generally rely on for research projects of this nature.
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