Here’s What Happened in the Service Sector in Q1

Wolf Richter wolfstreet.com, www.amazon.com/author/wolfrichter

Finance & Insurance, Which Dominates the US Economy, Has Blistering Q1. Huge Services Sector Not Yet Hit by Slowdown in Goods.

Revenues in private-sector services in the US rose 5.6% in the first quarter of 2019, compared to a year ago, to $3.94 trillion, according to the Commerce Department’s Advance Quarterly Selected Services Report released this morning. Services dominate the US economy: These “selected services” amount to the equivalent of about 74% of GDP. And all major categories booked solid to hot growth in the quarter.

The services sector, and the US economy overall is dominated, by four biggies. They accounted for $2.84 trillion in revenues in Q1, or about 72% of the total “selected services”:

  • Finance and insurance: 32% of “selected services.”
  • Healthcare: 17% of “selected services.”
  • Professional, scientific, and technical services: 12% of “selected services.”
  • “Information” services, such as telecommunications, software, and data processing: 11% of “selected services.”

The 5.6% year-over-year growth in “selected services” revenues was a slightly slower growth than the hot 6.2% growth in Q4 2018 and the 6.0% growth for all of 2018.

This data is not adjusted for inflation. For reference, the consumer price index (CPI) for services rose 2.6% over the same period.

The size of the services sector, and its continued solid growth, shows why the ongoing slowdown in the goods-based sector is unlikely to push the economy into a recession. Services matter the most. And services are still strong.

So here are the categories, with the biggies of the biggies on top. This does not include all services, just the biggest segments. In its “Advance Quarterly Services Reports,” the Commerce Department makes only limited data available about the sub-categories (it provides more detailed data in later reports). None of the data has been seasonally or inflation adjusted.

Finance and Insurance, Biggest of the Biggies.

This huge and diverse sector – nearly twice as big as healthcare services – dominates the US economy. Revenues in the sector grew 7.1% to $1.26 trillion in Q1, a new all-time record. For all of 2018, the finance and insurance sector amounted to about 24% of GDP. And its share of the economy continues to balloon relentlessly, as the economy continues to “financialize.” It makes a modern economy possible, but it is also leeching off the rest of the economy.

The table below shows total finance and insurance revenues, and the two largest subcategories. There is no separate data yet on the other subcategories, such as “securities, commodity contracts, and other financial investments and related activities.” But the data of these subcategories is included in the top line. All amounts in billions dollars except percentages as indicated (if your smartphone clips the table, hold your device in landscape position):

1Q 2019 1Q 2018 % Change
Finance & insurance  1,262 1,179 7.1%
Banks & Nonbanks 354 323 9.6%
Insurance carriers and related activities 706 654 8.0%

Healthcare and social assistance services.

The second largest services segment, healthcare, does not include the goods-based portion of healthcare, such as pharmaceutical products, medical devices, supplies, etc. This is just healthcare services. Revenues rose 4.5% in Q1 to $676 billion – and below the average growth rate of 5.6% for all services.

Healthcare services fall into four broad subcategories (bold in the table below). In the largest, “ambulatory services,” revenues grew 2.4% year-over-year to $261 billion in Q1. About half of these revenues are generated by offices of physicians.

1Q 2019 1Q 2018 % Change
Health care and social assistance  676 647 4.5%
Ambulatory health care (doctors, dentists, diagnostics, outpatient, home health care) 261 255 2.4%
Offices of physicians 127 125 1.3%
Outpatient care centers 37 35 5.6%
Medical and diagnostic laboratories 13 13 0.7%
Other ambulatory health care services 9 9 1.5%
Hospitals 300 285 5.1%
Nursing and residential care facilities 65 60 7.9%
Social assistance 50 46 8.5%

Professional services

Revenues in professional services grew 4.2% in Q1 year-over-year to $487 billion. This sector is dominated by “computer systems design and related services,” whose revenues in the quarter jumped 7.9% year-over-year to $110 billion.

“Legal services,” as is appropriate for the world’s most litigious society, jumped 8.6% year-over-year to $76 billion. This includes the lawyering that gets done for the M&A boom:

1Q 2019 1Q 2018 % Change
Professional, scientific, and technical services 487 468 4.2%
Legal services 76 70 8.6%
Accounting, tax preparation, bookkeeping, payroll services 55 53 3.4%
Architectural, engineering, and related services 83 85 -1.3%
Computer systems design and related services 110 102 7.9%
Management, scientific, technical consulting services 66 65 1.1%
Advertising, public relations, related services 24 25 -2.1%

Information Services

In this broad “information” segment, revenues rose 6.3% in Q1 to $416 billion. Telecommunication services dominate. This includes wired telecom services revenues of $77 billion, essentially flat compared to a year ago; and wireless telecom services revenues of $66 billion (not including satellite), which rose 2.4%.

But there was double-digit growth in data processing, hosting, and related services, which include internet and cloud-related services:

1Q 2019 1Q 2018 % Change
Information Services 416 391 6.3%
Publishing, incl. software (except Internet) 90 82 9.3%
Motion picture and sound recording industries 27 27 0.9%
Telecommunications, wired & wireless carriers 156 153 2.4%
Data processing, hosting, related services 48 42 14.3%
Other information services 53 46 14.5%

Administrative, support, waste management, and remediation services

Revenues in this category rose 5.8% year-over-year to $247 billion in Q1. The category is mostly composed of administrative and support services, employment services, and travel arrangement and reservation services. A small sliver is the subcategory of waste management and remedial services:

1Q 2019 1Q 2018 % Change
Administrative, support, waste management, remediation 247 234 5.8%
Administrative and support services 222 210 5.8%
Waste management and remediation services 25 24 5.0%

Transportation and warehousing services

This segment ranges from transporting passengers by air to transporting natural gas by pipeline and includes warehousing. Revenues rose 3.5% in Q1 to $236 billion.

And it confirms the slowdown in trucking after the boom: For all of 2018, truck transportation services had surged 8.5%, with the subcategory of “general freight trucking” up 11.5%. But in Q1, services revenues from truck transportation ticked up only 0.8% year-over-year, the weakest of the transportation sub-segments. This confirms prior reporting of declining shipments amid still rising freight rates:

1Q 2019 1Q 2018 % Change
Transportation and warehousing 236 228 3.5%
Air transportation 53 51 3.7%
Water transportation 11 10 8.7%
Truck transportation 69 68 0.8%
Transit and ground passenger 10 10 5.9%
Support activities for transportation 47 46 3.1%
Couriers and messengers 24 23 5.1%
Warehousing and storage 9 9 9.2%

Rental and leasing services

This category covers all types of renting and leasing services related to real estate, autos, trucks, equipment of all sizes, consumer goods, and the like. The largest sub-segment tracks services related to renting and leasing real estate, which rose 5.9%. Total revenues rose 5.2% in the quarter to $169 billion:

1Q 2019 1Q 2018 % Change
Rental & leasing, real estate, auto, etc. 169 161 5.2%
Real estate 117 110 5.9%
Autos, trucks, equipment, etc. 42 40 4.6%

Utilities

Revenues in this segment do not include government-owned utilities. The measure only accounts for services such as line charges for distribution, and the like, but does not cover revenues related to the actual products, such as natural gas, which are goods. It includes investor-owned companies that provide electric power generation, transmission, and distribution; natural gas distribution; and water, sewer, and other systems:

1Q 2019 1Q 2018 % Change
Utilities 155 153 1.2%

Arts, entertainment, and recreation:

1Q 2019 1Q 2018 % Change
Arts, entertainment, and recreation 67 61 10.9%
Performing arts, spectator sports, etc. 30 24 21.6%
Museums, historical sites, and similar 4 4 6.6%
Amusement, gambling, and recreation industries 34 33 3.3%

Accommodation services

This segment includes traveler accommodation, RV parks, recreational camps, and rooming and boarding houses:

1Q 2019 1Q 2018 % Change
Accommodation, traveler and RVs 60 57 3.7%

There are some private-sector services segments that are not included in this list. Services provided by government entities are also not included.

Finance and insurance, with a year-over-year growth rate in Q1 of 7.1%, was the fastest-growing segment of the four biggies, with revenues at banks and nonbanks growing at nearly 10%. These are big growth numbers in a very large sector – and for now, there are no indications that this is heading into a decline.

The much smaller goods-based sector of the economy is going through some gyrations at the moment, causing a lot of valid concern. But in terms of the overall economy, the biggies are services, and when they slow down enough, the economy will head into a recession, but not before then.

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