South-Western College Publishing - Economics  
The Long-run Importance of the Service Sector
Subject The Service Sector
Topic Aggregate Demand/Aggregate Supply
Key Words

Services, Consumer Goods, and Job Creation

News Story

Approximately 80 percent of household income flows back into the business sector as personal consumption expenditures. Consumers divide their expenditures among durable goods, nondurable goods, and services. Nearly 58 percent of consumer expenditures are made in the service sector, indicating what an important component of spending the service sector is to job creation in the U. S. economy.

The Institute for Supply Management conducts a survey to measure the growth in various sectors of the economy. When its index is above 50, it is an indication that the sector is growing. The most recent survey produced an index of 68.4 in April. This record index was an increase from 65.8 only a month earlier and offered further evidence of economic revitalization in the U. S. economy.

"We are seeing a very positive feedback between the manufacturing and nonmanufacturing sides of the economy," said Lynn Reaser, chief economist at Banc of America Capital Management in St. Louis, adding that "the employment index is up, which is good news."

Given the recent migration of many manufacturing jobs abroad, growth in the service industry provides an avenue for revival of the labor market. As foreign incomes rise, analysts expect that foreign appetites for services will not differ much from American consumers' demand for similar services.

Currently the United States has a trade surplus in services. In terms of volume, the most significant export of U. S services is airline transportation. Other services contributing to the surplus and with potential for growth include accounting services and financial services. To the extent that American firms can increase the export of existing services and develop future services for export overseas, the long-term impact on the labor market and the economy in general could be substantial.


(Updated June, 2004)

Questions
1.

Name the three components of consumer spending. Why do you thing that the demand for services is growing relative to the other two components?.

2. Make a list of at least 10 items that you think could be sold abroad as services.
3. What does it mean in the article when it states that we have a trade surplus in services?
Source Reuters, "Service Sector Jumps in April, as Orders and Employment rise," New York Times Online, May 6, 2004.

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