Sunday, April 3, 2011

Contracting and Expanding Industries

It is not so hard to spot a industry that’s declining. Few would argue with the new IBISWorld list of dying industries (“dying” appears to mean U.S. revenue declining by more than 50% between 2000 and 2016, in this case). The top of the list is land-line telephone. I remember thinking I was something of a trailblazer in dropping my land line in 2006, but a lot of people may have thought the same thing. According to IBISWorld, that industry’s revenue fell by 55% in the last 10 years. It is similarly no surprise that record stores and photofinishing are on the list. The one category that seems to surprise people is “formal wear and costume rental,” but now that I think about, the recession pretty well killed off formal wear as a costume style for social occasions, and none of the costume rental stores I remember visiting in the 1990s are still in business.

But the whole economy is not declining, even if most of the largest industries are. It is not so easy to spot an industry that is likely to expand in the next few years. Some are obvious enough, like robots and electric cars, but these are so small that they almost cannot help but expand. The bets two years ago were on education, health care, and information technology, which “always” expand, yet they are showing little sign of expanding right now. Instead, technological and cultural changes are improving productivity in those industries while chipping away at their revenue. For example, the newer computers last longer, so customers spend less money replacing them. In health care last week, scientists found that routine prostate screening does more harm than good. Scientific discoveries such as this one result in better health care but take away billions of dollars in revenue from doctors and hospitals.

Spotting the expanding industries is an important preoccupation for investors, who do more good for the world when they invest in an up-and-coming industry. It is also important for economists, because economic growth comes from expanding industries. Most large industries and product categories are declining most of the time; in times like this, nearly every industry is in decline. The economic growth comes from relatively few places, often in industries with new technology. If we can pick out the growth areas, it is easier to predict where the economy as a whole is heading.

On IBISWorld’s 10 dying industries list, there are two where their projections could be mistaken: textiles and clothing. U.S. companies face increasing global competition coupled with a declining U.S. demand for clothing. On the other hand, new technology such as robotics and cotton recycling could become important enough to turn a dying industry into a growth industry. But how are you supposed to predict when and where something like that will occur? You can see why the big growth industries often aren’t the ones we expect.