An Odd Decoupling in the US Private Service Sector

First-quarter US economic growth data were revised downward today by the Bureau of Economic Analysis (BEA), based on new information suggesting a slower pace of consumer spending on services. The change draws attention to an anomaly between strong private service sector job growth and weak private service sector output.

The BEA lowered real gross domestic product growth for the first quarter to an annualized rate of 1.8%, from its previous estimate of 2.4%. Consumer spending on services was responsible for most of the change, as the BEA incorporated new information from the Census Bureau quarterly service survey. Before the revision, real consumer spending on services—ranging from housing and healthcare to recreation and education—rose by 3.1% in the first quarter. After incorporating the new data, the growth rate was cut to 1.7%.

We were surprised by the change because it appears to contradict job growth figures for the private service industry. Yet the disconnect between private service sector output and job growth in the first quarter was not unique. This trend has been apparent for more than two years.

Historically, job creation in the private service industry has generally served as a good proxy for output growth, as the display below shows. The recent shift, in which private service sector output growth has trailed private service sector job growth, is hard to explain. The service sector has always been labor intensive, because people are needed to deliver services, whether in hospitals or transportation. Over the past decade or more, technology has played a bigger role in services, especially in healthcare, transportation and finance. But greater use of technology in services suggests that the rate of output growth should run above—not below—the increase in jobs.

Sector Output Growth Has Trailed Job Growth for More than Two Years

Indeed, companies across industries are keen on becoming more efficient. However, the trends in private service sector output and job growth suggest that productivity is declining and earnings are weakening, which should lead to less hiring and even job cuts. Yet private service sector job creation has been running consistently at about 170,000 per month for two years and service industry profits have been growing modestly.

It is hard to say with any certainty why the output and job figures for the private service industry are diverging, but one possible explanation is that the Census Bureau quarterly report on service industry revenue is understating output growth. The BEA will update the GDP figures several times in the years to come, and we would expect the final data to show private service sector output growth to be more in line with the pace of job creation.

In the short run, however, we think the job numbers still offer a good assessment of business activity, as they reflect what businesses are doing and experiencing in the real world.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio-management teams.

Joseph G. Carson

Director—Global Economic Research
Joseph G. Carson joined the firm in 2001. He oversees the Economic Analysis team for AllianceBernstein Fixed Income and has primary responsibility for the economic and interest-rate analysis of the US. Previously, Carson was chief economist of the Americas for UBS Warburg, where he was primarily responsible for forecasting the US economy and interest rates. From 1996 to 1999, he was chief US economist at Deutsche Bank. While there, Carson was named to the Institutional Investor All-Star Team for Fixed Income. He began his professional career in 1977 as a staff economist for the chief economist’s office in the US Department of Commerce, where he was designated the department’s representative at the Council on Wage and Price Stability during President Carter’s voluntary wage and price guidelines program. In 1979, Carson joined General Motors as an analyst. He held a variety of roles at GM, including chief forecaster for North America and chief analyst in charge of production recommendations for the Truck Group. From 1981 to 1986, Carson served as vice president and senior economist for the Capital Markets Economics Group at Merrill Lynch. In 1986, he joined Chemical Bank; he later became its chief economist. From 1992 to 1996, Carson served as chief economist at Dean Witter, where he sat on the investment-policy and stock-selection committees. He received his BA and MA from Youngstown State University and did his PhD coursework at George Washington University. Location: New York

Related Posts