Oregon Industry Employment Responses to the Business Cycle

by Brian Rooney

May 29, 2019

As of the writing of this article, the U.S. economy is poised to achieve the longest expansion in its history. Although we are in an extended period of slow, steady growth, it is not likely that we are witnessing the death of the business cycle. As the economy moves forward, a recession becomes more likely, and knowing how industries react to overall economic trends can help employers and workers prepare for it. For example, in highly cyclical industries, employers can avoid layoffs with part-time work, temporary downtime, or the Oregon Work Share program. Workers should also be aware that layoffs are likely in these industries. Additionally, workers may also avoid layoffs during a recession by taking a job in an industry that is less cyclical.

With the next recession in mind, we can look back at the last one for information about the direction and volatility of employment in different industries. The Great Recession was the longest, deepest recession since the Great Depression. Because it was so definitive, it clearly illustrates how employment in different Oregon industries reacts to the overall expansions and recessions of the economy.

For this analysis, l classify industries into three categories: 1) pro-cyclical industries that move with the overall economy, losing jobs during the recession and gaining during a recovery; 2) noncyclical industries that are not affected much by movements in the overall economy; and 3) counter-cyclical industries that increase employment during a recession and decrease during the recovery.

Pro Cyclical Industries

Most sectors of the economy are pro-cyclical and follow total employment closely. Generally, a few large, varied industries tend to drive the cycle as much as follow it. They include retail trade, financial activities, professional and business services, and leisure and hospitality.

Some pro-cyclical industries are very volatile and magnify the business cycle, increasing and decreasing more than total employment. The goods-producing industries of construction and manufacturing are two such industries. During a recession, new home building, renovation, and commercial expansion are some of the most affected business activities as income and investment drop. When the economy is growing, demand for new homes, renovation, and commercial space increases, stoking employment in construction. Similarly, demand for new manufactured goods drops rapidly in a recession as income drops and people make do with what they have. During a recovery, pent-up demand can cause a rapid rebound. Construction and manufacturing are prevalent in Oregon, causing the overall economy to be more volatile than the U.S.

The employment services industry, which is a subsector of professional and business services and includes temporary help firms, is also highly cyclical. It includes employment services in a wide variety of industries, but these are often the most expendable workers when the economy heads into recession and, conversely, the first workers hired when the economy swings out of recession into expansion. This industry can be a leading indicator because employment changes happen earlier and more definitively than in industries with more permanent employment.

Non-Cyclical Industries

Employment in noncyclical industries is mostly unaffected by the direction of the overall economy. These industries have “sticky demand” meaning there is always some demand for their goods or services despite income trends. These industries are largely made up of goods and services that are necessities. Employment in health services, food products manufacturing, and social services were not as affected by the Great Recession as other industries. Utilities, other health related industries such as pharmaceuticals, and other food related industries such as some agriculture products are also noncyclical.

Counter Cyclical Industries

For this article, counter-cyclical industries are those where employment goes in the opposite direction of total employment as we move through the business cycle. Education, and in particular higher education and especially junior colleges, are truly counter-cyclical. During a growing economy, jobs are available and people choose work over education, reducing demand at colleges. During a recession, however, people find “safe harbor” in education or, if they are laid off, retrain for a new job. As Patrick Crane, Director of Community Colleges and Workforce Development at the Higher Education Coordinating Commission says, “Community college enrollment is counter-cyclical with the economy. When the economy is down, people enter or reenter higher education to gain new skills and training.” Employment in the junior college industry, which includes community colleges and some training providers, increased during the last recession and then dropped during the recovery.

Employment in other types of education looks to be slightly counter-cyclical or at least noncyclical. Damon Runberg’s excellent article about enrollment in Oregon’s public universities, shows that the counter-cyclical nature Oregon’s four-year universities has been tempered in recent years by growth from non-resident students.

The Great Recession and following recovery were definitive, giving us an opportunity to look back to see how different Oregon industries behave as we go through the business cycle. Industry behavior in the next recession and recovery won’t exactly mirror the trends of the Great Recession. Some industries could face unforeseen declines or surprising growth. There’s no perfect way to prepare for the economic future. However, knowing how industries tend to behave as the business cycle progresses can help employers and workers prepare. After all, neither expansions nor downturns can last forever.

 


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