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Service sector grows, but it isn't apt to offer relief on ups 'n downs

By Leonard H. LempertSpecial to The Christian Science Monitor / July 24, 1985



Manufacturing in the United States appears to be in trouble. Services, we are told, are taking up the slack and will become even more important in keeping the economy moving. But the short-term effect of services in averting the economy's cyclical ups and downs is minimal.

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The real (inflation-adjusted) gross national product for second-quarter 1985, which rose at a scant annual rate of 1.7 percent, included a 3.7 percent annual rise in services. Services were 30.4 percent of total GNP.

One quarter does not tell us much about the effect of services. Let's look at the past year:

In the second quarter of '84, GNP increased 7.1 percent. Services were up 4.6 percent.

For the third quarter, GNP rose 1.6 percent, while services climbed 3.8 percent.

In the fourth quarter, GNP grew 4.3 percent; services, 3.3 percent.

In the first quarter of this year, GNP rose only 0.3 percent; services were up 5.0 percent.

And in the second quarter, with that 1.7 percent GNP increase, services increased 3.7 percent.

While it is true that over the entire period services have risen more than total GNP, the quarterly changes in total GNP bear little relation to the quarterly changes in services.

On two occasions (the second and fourth quarters of 1984), the GNP increase was greater than for services. On two occasions, services slowed (IV '84 and II '85) and GNP accelerated. And once (I '85), services accelerated significantly, while total GNP almost stood still.

Back in 1933, more than a half-century ago, services represented a record 32 percent of GNP. That has never again been equaled. The corresponding percentage today is 30 percent.

So why is everyone making such a fuss over the role of services in the US economy?

After the 1933 peak, services became less and less of a force, falling to only 18 percent in the early years of the World War II. By 1947, the portion was back up to 25 percent. Since then there has been a slow, gradual rise to a 1982 high of 31 percent.

With the comeback in the economy from the 1981-82 recession, the portion of GNP attributable to services lessened to 31 percent in 1983 and to 30 percent in '84. It has remained near 30 percent in the first half of '85.

If manufacturing falls into recession, the overall economy will be in a recession. Services are not growing strongly enough to prevent it.

Memories are short-lived. Only three years ago, the economy experienced its longest, deepest, and most severe recession since the 1930s. The role of services in the economy at that time could not have been substantially different from what it is today. The change in the effect of services in as short a period as three years is essentially nil.

Even the quarterly data for the past year offer nothing to substantiate the contention that there has been an extraordinary rush away from manufacturing and into services: Services were 29.8 percent of gross national product in the second quarter of '84; 30 percent in the third quarter; 29.9 percent in the fourth; 30.3 percent in the first quarter of '85; and 30.4 percent in the second quarter.

When the services portions have been the greatest (II '84, I '85, and II '85), the GNP increases have been the smallest. When the services portions have been the smallest (II '84 and IV '84), the GNP increases have been the greatest. It is clear that GNP components other than services dominate GNP.

As it is, the steady long-term increase in the services portion of gross national product since the late 1950s has coincided with the steadily diminishing pace of long-term economic growth in the US during those years.

The increasingly negative American balance of trade and the country's emergence as a debtor nation also reflect the long-term growth of services. Foreign exporters of goods to the United States are not about to accept services in payment for goods.

In the short run, then, the growth of services cannot be expected to counterbalance weakness in other areas of the American economy. And in the long run, services cannot be expected to encourage long-term growth in the economy, either.

Mr. Lempert is director of Statistical Indicator Associates in North Egremont, Mass.