Crunch Time For Services

As the economy heads further into recession in 1991, what sector is going to be the big loser? Early indications are that services--the two-thirds of production not manufactured or mined--are going to be hardest hit. In last year's Industry Outlook, we pointed to weaknesses in services that already suggested a bad year, and we were right. Retailing, fast food, restaurants, advertising, publishing, real estate, and banking had a terrible year, and the chilling prospect is for more of the same.

Of course, the economy will bounce back, and so will these industries. But when? The consensus of economists polled by BUSINESS WEEK is that there will be an upturn in the third quarter of 1991, but there's no guarantee that they are right. After all, they didn't see the recession coming. Why should they be correct in timing its departure?

But until the economy turns, the service sector is in for a particularly rough time. Part of the reason is the deferrable nature of many services. Far more important is that, unlike manufacturing, services haven't gone through a slimming-down exercise in years. Having gorged itself during the `80s, the sector has become woefully overstaffed and undermanaged compared with manufacturing. In a recession, the ugly truth is there for all to see. Overall, the manufacturing sector, which had to slash overhead in the 1981-82 recession to survive, is in better shape to cope with a recession than services.

What are managements in these industries to do? The specific remedies will obviously vary from industry to industry, but there is a common message for all: Cut costs with an eye to the long term. Paring payrolls will be necessary, especially in the bloated and overstaffed banking and securities industries. Other industries, notably retailers, must slash their swollen debt-servicing costs. In some--for example, restaurants--an industrywide contraction is inevitable. Transcending details, though, is the recession's unyielding pressure. Managements that can't get their costs under control will find the market does it for them.

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