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1.3. The Service Sector of the U.S. Economy

From a macro viewpoint, an economy may be divided into three different sectors for study: the extractive sector, which includes mining and agriculture; the goods producing sector, which includes manufacturing and construction; and the service sector. The service sector has a tremendous impact on the U.S. economy. The next five headings discuss this impact.

Employment—The role services play in terms of employment is the easiest to illustrate. The U.S. economy today is characterized as a “service economy.” This is because the majority of the working population is employed in the service sector. Trend analyst John Naisbitt made the following observation: “In 1956, for the first time in American history, white-collar workers in technical, managerial, and clerical positions outnumbered blue-collar workers. Industrial America was giving way to a new society, where, for the first time in history, most of us worked with information rather than producing goods.”2 The share of the service jobs grew steadily to 76 percent by the mid-1990s, and as indicated in Exhibit 1-3, it had reached 84 percent by 2010. In other words, anyone who is planning to enter the workforce today has about an 84 percent chance that she’ll be working in a service organization. Exhibit 1-4 illustrates the dramatic increase in service jobs since 1970.

Exhibit 1-3. U.S. Employment by Industry (Millions)

1970

1980

1990

2000

2010

Extraction

4.14

6%

4.44

5%

3.99

4%

4.35

3%

4.17

3%

Agriculture

3.46

3.36

3.22

3.75

3.42

Mining and logging

0.68

1.08

0.77

0.6

0.75

Goods producing

21.5

30%

23.18

25%

22.96

20%

24.06

18%

17.04

13%

Construction

3.65

4.45

5.26

6.79

5.52

Durable goods

10.76

11.68

10.74

10.88

7.06

Nondurable goods

7.09

7.05

6.96

6.39

4.46

Service providing

46.1

64%

66.26

70%

85.77

76%

107.1

79%

112.12

84%

Wholesale trade

3.42

4.56

5.27

5.93

5.45

Retail trade

7.46

10.24

13.18

15.28

14.44

Utilities

0.54

0.65

0.74

0.6

0.55

Transportation and warehousing

NA

2.96

3.48

4.41

4.19

Information

2.04

2.36

2.69

3.63

2.71

Financial activities

3.53

5.03

6.61

7.69

7.65

Professional and business services

5.27

7.54

10.85

16.67

16.73

Education and health services

4.58

7.07

10.98

15.11

19.53

Leisure and hospitality

4.79

6.72

9.29

11.86

13.05

Other services

1.79

2.75

4.26

5.17

5.33

Government (Federal,state, and local)

12.69

16.38

18.42

20.79

22.49

Total employed

71.74

100%

93.88

100%

112.7

100%

135.6

100%

133.33

100%

Source: Bureau of Labor Statistics, Employment, Hours, and Earnings from the Current Employment Statistics survey (National), http://data.bls.gov/cgi-bin/surveymost?ce (Accessed on 07/5/12).

01fig04.jpg

Exhibit 1-4. How Jobs in the Service Sector Have Soared

Source: Bureau of Labor Statistics, Employment, Hours, and Earnings from the Current Employment Statistics survey (National), http://data.bls.gov/cgi-bin/surveymost?ce (Accessed on 07/5/12).

Gross domestic product—Gross domestic product (GDP) is the total output of goods and services produced in the United States, valued at market prices. In other words, GDP represents the total value of goods and services attributable to labor and resources located in the United States. Services will be producing more than 82 percent of GDP in the years ahead. Exhibit 1-5 presents data on the breakdown of GDP and change in its composition since 1970. It is clear from this exhibit that service sector produces most of the value in our economy. This does not imply that manufacturing will eventually disappear or become unimportant, but it does indicate that more of the economic activity will be in the service sector. As shown in Exhibits 1-5 and 1-6, the share of GDP in extraction industries has been hovering above an average of approximately 2.5 percent in the last three decades. The share of goods production, however, has steadily declined to 15 percent in 2010 from a high of 27 percent in 1970.

Exhibit 1-5. U.S. Gross Domestic Product by Industry (in Billions of Dollars)

1970

1980

1990

2000

2010

Extraction

42.4

4%

152.9

5%

184.1

3%

204.5

2%

396.5

3%

Agriculture, forestry, fishing,and hunting

27.3

62.1

95.7

95.6

157

Mining

15.1

90.8

88.4

108.9

239.5

Goods producing

285.1

27%

689.8

25%

1212.5

21%

1882.9

19%

2213.5

15%

Construction

49.5

131.5

243.6

467.3

511.6

Manufacturing

235.6

558.3

968.9

1415.6

1701.9

Service producing

711.0

69%

1945.3

70%

4404.1

76%

7864.1

79%

11916.5

82%

Wholesale trade

67.7

186.3

347.7

617.7

797.3

Retail trade

83

198.3

400.4

686.2

884.9

Utilities

21.7

61

145.5

173.9

264.9

Transportation and warehousing

40.2

102.6

172.8

301.4

402.5

Information

37.4

108.3

235.6

417.8

623.5

Finance,insurance, real estate,rental, and leasing

152.8

446.8

1049.2

1997.7

3007.2

Professional and business services

52

173.1

516.5

1116.8

1782.8

Educational services, health care,and social assistance

40.3

134.1

376.7

678

1272.3

Arts,entertainment, recreation, accommodation, and food services

29.8

83

199.6

381.6

555.8

Other services, except government

27.8

68.5

153.9

277.6

356.8

Government

158.3

383.3

806.2

1215.4

1968.5

Total Gross domestic product (*)

1038.3

100%

2788.1

100%

5800.5

100%

9951.5

100%

14526.5

100%

*Sum of extraction, goods producing, and service producing may not be equal to totals due to rounding.

Source: Bureau of Economic Analysis, “GDP by Industry.” http://bea.gov/iTable/iTable.cfm?ReqID=5&step=1 (07-06-2012)

01fig06.jpg

Exhibit 1-6. Changes in Major Components of GDP over the Years 1970–2011

Source: Bureau of Economic Analysis, “GDP by Industry.” http://bea.gov/iTable/iTable.cfm?ReqID=5&step=1 (07-06-2012)

Number of business starts—Some of the new jobs are created in the existing organizations as they grow, but others are created when new companies are established. The service sector is where most new companies are formed. About 73 percent of all new private businesses are service companies. In other words, the service sector is “where the action is” and where entrepreneurial spirit is most vigorous.

International trade—Services also play an important role in the U.S. international trade. During the 1960s and 1970s, service exports constituted approximately 22 percent of the U.S. exports. However, in the 2000s the service exports have reached approximately 30 percent of the total exports. The United States also imports services from abroad; currently, approximately 20 percent of the imports are services. The most important fact, however, is that the service exports consistently exceeded service imports since 1971. In other words, services exported bring more revenue than what is paid to other nations for their services. The U.S. has had a negative trade balance every year since 1976. That is, what we paid to other countries for goods and services we bought from them exceeded what we received from them for the goods and services we sold to them. Exhibit 1-7 provides international trade balance data from the recent past. As can be seen from this exhibit, the trade deficit would have been much bigger if it weren’t for the surplus in service trade.

Exhibit 1-7. U.S. Trade Balance (Billions of Dollars)

Year

Total

Goods

Services

1960

3.51

4.89

–1.38

1970

3.90

2.58

–0.35

1980

–19.41

–25.50

6.09

1990

–80.87

–111.04

30.17

2000

–376.75

–445.791

69.04

2010

–516.90

–645.12

150.39

Source: Bureau of Economic Analysis, Table 1 U.S. International Transactions, http://www.bea.gov/international/xls/table1.xls (07/10/2012).

Contributions to manufacturing—Although we customarily divide the economy into three sectors, these sectors are not wholly independent of each other. The relationship between manufacturing and services is the strongest; one cannot exist without the other. Some services would not exist if not for goods. For example, automobile repair service would not exist without cars. Similarly, some goods would not exist without the existence of services. For example, stadiums would not be built if there were no football, baseball, or soccer to be played in them; or there would be no drugs to cure illnesses without research and development services.

The relationship between manufacturing and services goes much beyond this simple relationship in which one uses the output of the other. Most manufacturing companies would not produce goods without the support of numerous services. Some of these services are commonly provided internally, such as accounting, design, advertising, and legal services. Other services are provided by outside vendors in areas such as banking, telecommunication, transportation, and police and fire protection.

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