Service sector

The services sector is the key to economic recovery after the coronavirus

Wall Street’s most optimistic economic forecasts hinge on a simple prediction: everyone will soon be returning to their local gyms, bars and yoga studios as if the pandemic is a thing of the past.

A job boom in the vast service sector in the United States – the country’s largest employer, including software developers and restaurants – is at the heart of bold calls for growth this year.

The idea is that vaccines and rising immunity will trigger pent-up demand, which will spark a wave of hiring that will drive down unemployment sharply. The Federal Reserve sees the unemployment rate dropping to 5% by the end of 2021 and some private sector players, including Goldman Sachs Group Inc. and Deutsche Bank, have projections of around 4%.

The Labor Department takes a fresh look at the service sector with the February jobs report on Friday. The jobless rate is expected to climb to 6.4% from 6.3%, according to a Bloomberg survey.

The low readings in December and January, which coincided with an escalation in virus cases in the United States, were concentrated in sectors such as leisure, hospitality and retail. The service sector, which employs 122 million people, has nearly 9 million fewer workers than when the pandemic hit early last year.

Fed Chairman Jerome H. Powell said in comments to the House Financial Services Committee last week that he was concerned about the continued disruptions to service-sector jobs.

“What we’re going to find out based on some of the surveys that we’ve heard about is that all of those jobs aren’t coming back because people have started implementing automation,” Powell said. “A lot of these people may be struggling to get back to work, and I think they will need some extra support.”

Cautious consumer

The labor-saving technology introduced during the pandemic is just one reason why optimistic forecasts are fraught with uncertainty.

No one knows how long cautious consumer behavior will persist even after widespread vaccination, or how many small businesses have failed, or whether companies have just found they can meet demand with fewer employees.

“We can’t say based on current data how quickly things will come back” in services, said Ernie Tedeschi, political economist at Evercore ISI in Washington. “There are reasons to be optimistic.”

He points to the potential for a rebound as vaccine distribution improves, particularly in sectors such as hospitality and retail. But he also worries that the United States doesn’t have good readings on small business closures. Economists also don’t understand how quickly women who left work to care for children will return to the workforce, or how quickly companies that have downsized will rehire.

“There are frictions and bottlenecks in converting demand to supply,” Tedeschi said. “Reopening a new restaurant to replace one that has closed permanently is not a matter of flipping a switch. It takes capital, financial connections and all of that takes even longer.

Upcoming challenges

Dan Price, chief executive of Gravity Payments, a Seattle company that serves 20,000 customers, including many small businesses, is concerned.

“We had a 50% increase in the percentage of companies that completely retired for good,” he said. “It was hard to see.”

Many Price customers who use Gravity for card processing have spent years building their businesses. If they start again, it will take time to rebuild. Those still working have struggled to make hiring plans because the pandemic has lasted so long.

Two examples from different industries show how some have thrived while others are trying to pivot.

Case studies

Nicholas Chiaramonti is executive vice president of professional and retail operations at Rosin Optical Co., an integrated eye care company with physicians and opticians serving more than 100,000 patients through more than 60 outlets in three states. Rosin was founded in the difficult times of 1930.

Rosin cut staff for the first time in Chiaramonti’s career by around 80 professionals, although some were voluntary retirements. He is optimistic about the recovery. Working and studying from home has been difficult for parents and their children, creating high demand for Rosin’s services.

“Patient demand was immediate” when restrictions were lifted last April, Chiaramonti said. “Our diaries are full”

Still, Rosin’s response to rising vaccine rates and returning demand is stark: He doesn’t plan to rehire any time soon.

Matt Brennan’s experience in Milwaukee, Wisconsin was different. JM Brennan, a commercial entrepreneur, was founded by his grandfather in 1932.

As the pandemic swept the country last year, JM Brennan laid off 100 workers, the first large-scale workforce reductions in the company’s history. Brennan’s work in the trade offices, which covers both goods and services, has been suspended. His contract with the hospital has been delayed as health facilities focus on serving patients during the pandemic.

Like many industries, it’s trying to reorient itself to capture more business in areas where the economy is doing well, like foodservice, but it’s difficult.

“There’s so much uncertainty,” said Brennan, who predicts the labor market recovery will be slower than expected. “It’s not going to be like, ‘We flip a switch, we beat the virus, and we’re done.'”

A boost in service-sector spending and hiring “is absolutely essential for GDP growth to return to a normal pace,” said Bloomberg senior U.S. economist Yelena Shulyatyeva, who forecast unemployment at 5.7% by the end of the year.

The weakest part of the rollback argument, she said, is the presumption that people quickly forget about the health risks. “There will be pockets of strength, but I absolutely don’t see us going back to pre-crisis behavioral norms.”