THE SERVICE ECONOMY: Growth in a New Direction

WHILE economists disagree on the immediate future course of U.S. business (see State of Business), they all agree on one basic premise: the U.S. economy has undergone such a profound change in recent years that the old tools to measure its size and health are no longer adequate. The biggest sector of the economy is no longer the production of such tangibles as appliances, cars, houses; it is the performance of services, ranging from medical checkups to European trips and cha-cha lessons. In this new economy, there are 33 million employed in performing services compared to only 27 million working at producing things. In the last quarter, consumer spending for goods dropped $2.5 billion, but spending for services continued to rise by another $2 billion.

The well-heeled consumer no longer needs to spend most of his income on food, clothing and other necessities; after he has taken care of these, he still has a large “discretionary” income that he can spend for more goods or for more services—and he has been spending more heavily for services. The problem for economists is to try to chart the effect of this.

To many, the current business slowdown is really an adjustment to the consumer’s growing predilection for the myriad new services his money can buy. “This causes dislocations within the economy,” explains Sears, Roebuck Chairman Charles H. Kellstadt, “but given the level of gross national product and disposable income, it is no cause for alarm. It simply reflects the fact that our rising standard of living has made us a predominantly consumer-oriented economy. It is not a case of not growing, but of growing in a new direction.” In the past five years the real output of services has risen almost 27% v. an overall real growth in the G.N.P. of 18%.

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Much of the boom in services is a natural outgrowth of the success of the durable goods producer’s assembly lines. Nearly $18 billion was spent on autos and auto parts last year, and U.S. motorists paid another $6 billion for servicing them. Nevertheless the prospect of consumers’ spending more and more of their money for green fees and plane rides instead of new cars and bigger TV sets is not a happy one for the makers of durable goods. The auto industry has already begun to fight back for a bigger share of the consumer’s dollar spent in garages, e.g., the 1961 Fords have 30,000-mile no-lubrication chassis.

A popular new service does not always undercut production profits; it often creates a market for a new product. The hand laundry is giving way to the self-service laundromats. In four years the number of laundromats has jumped from 4.000 to 25,000. Of 2,900,000 washing machines produced by the industry last year, some 10% were made for self-service stores. The next step may well be dry-cleanomats —and a new market for hard goods. Norge has brought out a coin-operated dry cleaner that will clean eight pounds of clothes for $1.50.

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Today 40¢ of every consumer dollar is spent on services—and statisticians include doctors and dentists as well as doormen in this category. Yet service figures are not given their full weight in the standard measurements of the growth or future of business. One reason is that it is hard to assess an increase in productivity in services. Another is that the real value of a good doctor or a good teacher is hard to translate into dollars and cents. Better measurements are needed, so that the emphasis on production statistics will not bulk so large as to overshadow the fastest-growing sector of the nation’s business.

Some economists contend that the service boom is detrimental to U.S. growth, that spending money on haircuts for poodles and diaper service does not add to the base of real wealth. Economist Grover W. Ensley, executive vice president of the National Association of Mutual Savings Banks, takes the opposite view: “Today a large segment of service expenditures goes for medical care and education, which represent investments that are very productive in improving the future output of the nation. Even money spent on beautification of the fairer sex may turn out very productive in the long run.”

Even if it could be proved that service spending has caused a slowdown in durable goods sales, it has also had a healthy, stabilizing effect. While cutbacks in production employment come fast in a recession, the service trades usually remain steady. In the 1954 recession, factory employment fell 10% but personal income only 1%. In the 1957-58 dip, employment dropped 9.5%, but personal income and consumer spending each dropped less than 2%, largely buoyed by service spending, which rose more than 3%. With the drop in total personal income thus cushioned, demand picks up all the more quickly. Thus, as service employees and service spending increase, the U.S. economy is likely to become more and more stable, less susceptible to fluctuations in the production sector that have touched off overall economic setbacks in the past.