As the U.S. economy wallows in a slowdown, soon to be officially designated a recession, it would help to refresh our memories about what it’s like during those periods. After all, the economy hasn’t been in this condition for 10 years.
Dark headlines, plunging fever lines and punditry aside, what does a recession mean for the average family?
As usual, economists will answer that by saying, “It varies.” Indeed, not all households are affected the same. And through quirks, some people thrive when the economy tanks.
Economists think of recessions in terms of declining production of goods and services. This usually means fewer workers doing the producing.
And this is how most people know they’re in a recession: They, or someone they know, lose their jobs or have their hours cut. This is the most visible and socially the most painful aspect of a recession.
Unemployment compensation helps somewhat, but when a breadwinner loses a job for an extended period, most households experience a blow to their finances. Moreover, it’s harder for laid off workers to get another job during a recession.
Layoffs are never evenly distributed across the population, either. Recent entrants to the labor force — especially those with low skills — are often the first to be laid off when orders slow. These tend to include higher proportions of young people and racial minorities.
But white, suburban middle managers can get pink slips, too.
Ten years ago, Minnesota defense contractors such as Alliant Techsystems and United Defense’s Northern Ordnance laid off scores of well-paid workers as defense procurement dropped.
Today, layoffs are likely to include more communications and information technology workers.
Spending Changes
Losing a job forces some households to curb spending. Fear of losing a job, or getting reduced hours, motivates many more families to also cut back. But not all consumer spending is cut equally.
Some products don’t suffer any drop in sales. Grocery shoppers, for instance, do not buy less salt because of a tight budget. But they do substitute hamburger for steak or chops.
New car sales tend to suffer, but repair businesses may experience stronger business as people fix up the family van rather than buy a new one.
My nephew, who is a car mechanic, says that recessions are good for him because salespeople — who put on 50,000 or more miles per year — will spend $4,000 for an engine overhaul when their commissions are thin, rather than laying out $30,000 for a new model as they might when times are good.
Appliance and shoe repairmen also have pretty recession-proof businesses as people fix and make do rather than throw out and buy new. But recreational vehicle and powerboat dealerships will suffer.
And some businesses can see sales dry up almost entirely.
A friend is a landscape designer for a large Twin Cities nursery firm. He swears that there’s no business more sensitive to recessions than landscaping. If someone’s toilet backs up or a pipe bursts, they call a plumber. But if they were thinking about a new retaining wall, some shrubs, and a permanent irrigation system, it’s easy to pass.
Sectors Suffer
People don’t cut out all the little luxuries of life, but they tend to back down the expenditure ladder.
Instead of going to an expensive restaurant, families will go to a cheaper place.
The same is true for recreation. More rented videos, fewer first-run feature films. Less skiing, and more bowling.
Construction also may tank. Developers tend to overdevelop when times are booming. Then they have a glut of houses, offices or warehouses to get rid of when times are bad.
But many sectors will see little drop in activity or unemployment.
Doctors and pastors will still get their salaries, as will schoolteachers, postal workers, police and firefighters and other government workers.
The important thing to remember is that this recession will pass. When, we do not know, perhaps by mid-2002 and maybe not until early 2003.
But the economy will return to growth and most households will weather the slowdown without permanent damage.
© 2001 Edward Lotterman
Chanarambie Consulting, Inc.