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U.S. INDUSTRY VOLATILITY AS WE ENTER A RECESSION

As we head into the recession, it is important to know which industries are most affected in the real economy (not a capital markets view).

We borrowed the Beta concept from finance. It is a measure of how much volatility there is relative to the total market. We call it Reta so it is not confused with capital markets Beta.

Reta = volatility in the industry relative to the volatility in the private sector.

The graph shows how Reta differs for select industries. See how sensitive oil & gas and automotive are, while food & beverage is counter-cyclical.

Also note the large differences between goods and services. This explains why the manufacturing belt between the coasts suffer more in recessions.

Covid is not taken into account.

Technically:

Value added (VA) = Revenue less purchases = Labor plus capital inputs = GDP contribution

Reta = Covariance(industry value added growth, private sector value added growth) / Variance(industry value added growth)

Reta >1 Industry more volatile than private sector. 0< Reta <1 Industry less volatile but synchronized. Reta =0 Industry does not move with private sector. Reta <0 Industry is counter-cyclical.

Source: BEA’s quarterly industry value added accounts 2005–2019