Will Service Sector Boom Reduce Deficits?

Popular Economics Weekly

Econoday.com

All 18 non-manufacturing industries reported growth in February, according to the ISM’s non-manufacturing index, which gives a monthly overview of service sector activity. This is huge and says the service sector that makes up two-thirds of US business activity will continue to power growth this year.

In fact, a growing US service sector is keeping the trade and budget deficits from worsening at a time when fiscal policy (the tax cuts) and trade policy (the tariffs) are slowing economic growth in 2019.

What is the service sector economy? It’s the financial services, trade, transportation, construction, education and health industries, for starters. It has become the dominant sector because most US consumers and businesses consume manufactured goods now made overseas. Hence the trade imbalance between imports and exports that Trump wants to ‘rebalance’ with his trade wars on allies and adversaries alike.

The trade wars are a dumb way to attempt to correct the imbalance of manufactured products, needless to say, because said ‘imbalance’ is offset by foreign investors eager to buy safe and secure US stocks and bonds. If the Trump administration and Republicans were really serious about rebalancing the trade imbalances, it would seek more trade alliances (such as the Trans-Pacific Partnership) and work to reduce the looming $1 trillion annual deficit, instead of passing the 2017 corporate tax cut.

The non-manufacturing sector’s growth rate rebounded after cooling off in January. Respondents said they are concerned about the uncertainty of tariffs, capacity constraints and employment resources; however, they remain mostly optimistic about overall business conditions and the economy.

“The NMI^® registered 59.7 percent, which is 3 percentage points higher than the January reading of 56.7 percent,” said Anthony Nieves, Chair of the Institute for Supply Management Non-Manufacturing Business Survey Committee. “This represents continued growth in the non-manufacturing sector, at a faster rate. The Non-Manufacturing Business Activity Index increased to 64.7 percent, 5 percentage points higher than the January reading of 59.7 percent, reflecting growth for the 115th consecutive month, at a faster rate in February.”

Particularly robust was the New Orders Index that registered 65.2 percent, 7.5 percentage points higher than the reading of 57.7 percent in January. The Employment Index decreased 2.6 percentage points in February to 55.2 percent from the January reading of 57.8 percent.

What about the manufacturing sector that is made up of durable goods like machinery, computers and transportation; and non-durable goods such as furniture, chemicals and petroleum products? The ISM’s February manufacturing survey reported a 2.4-point drop to 54.2 in February that was above low estimates. There was also a 2.7-point drop in new orders, a 3.2-point drop for employment, and a 5.7-point slide for production.

Council On Foreign Relations

The trade wars have to be part of the problem, since Trump has focused on tariffs for manufactured products only, whereas China is also stealing information technology. Hence the Hauwei networking ban that the US fears might have implanted Chinese spyware.

“Demand remains healthy at the beginning of 2019,” said one respondent. “However, growing concerns for what could be another round of tariffs in March are further escalating price increases of already constrained electronic components.”

The total US trade imbalance was minus $550B last year, with service sector trade showing a net trade surplus of around $250B, since we export much of our information technologies, and approximately $800B net deficit in manufactured goods that are more cheaply made overseas.

“So we can’t “win” a trade war,’ says Nobel economist Paul Krugman. “What we can do is start a cycle of tit-for-tat, and when it comes to trade, America — which accounts for 9 percent of world exports and 14 percent of world imports — is by no means a dominant superpower. A cycle of retaliation would shrink overall world trade, making the world as a whole, America very much included, poorer.”

Therefore it’s not such a good idea to expend too much of our energy in attempting to correct the manufacturing imbalance, when there are better ways to cure deficits that are of our own making.

Harlan Green © 2019

 
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