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The Financialization of the US Economy

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Published : September 07th, 2019
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Category : Editorials

Services are Hopping. The #1 Biggie is Hopping the Fastest. It all adds to GDP!

Service-producing industries dominate the US economy, accounting for over 70% of GDP. And this sector is hopping. Revenues in the major services categories rose 5.3% in the second quarter of 2019, compared to the same quarter a year earlier, to $4.05 trillion, not seasonally adjusted, according to the Commerce Department’s Quarterly Selected Services Estimates released today. For the first two quarters of 2019, service revenues rose 5.5% to $8.0 trillion. The pace of growth so far this year is slightly lower than the hot 6.0% growth for the year 2018.

Four biggies dominate the service sector, and the US economy overall. They accounted for $2.92 trillion in revenues in Q1, or about 72% of total service revenues, with the biggest of them all, finance and insurance, accounting for 32%, up from 31% at the end of last year. It is also the fastest-growing segment, even faster than healthcare, as the US economy is getting more and more financialized. The share of each of the big four of overall service revenues:

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

#1 Biggie: Finance and Insurance.

Revenues in the finance-and-insurance sector rose 7.0% to $1.28 trillion in Q2, a new record, and the fastest growth of any major sector. For the first two quarters, revenues rose 6.9% to $2.54 trillion.

The sector includes the Federal Reserve, whose 12 regional reserve banks are privately owned institutions. But with its $26 billion in revenues in Q2, it’s a minor line item, representing 2% of total finance and insurance revenues. Its revenues fell 7.7% in Q1 and 6.9% so far this year, in part due to its shrinking balance sheet – and thus shrinking interest income. Without the drag of the Fed, finance and insurance revenues rose 7.4% in Q2.

The largest sub-segment is banking: Deposit-taking banks (commercial banks, credit unions, and the like); and nonbanks or shadow banks (lenders that don’t take deposits). Revenues jumped 7.0% in Q2 to a record $360 billion, with shadow banks having bypassed deposit-taking banks some time ago (if your smartphone clips the table, turn the device in landscape position):

Q2 2019, $ billions Change fr. Q2 2018 YTD 2019, $ billions Change fr. YTD 2018
Finance & insurance  1,280 7.0% 2,539 6.9%
Finance & insurance (except the Fed) 1,254 7.4% 2,485 7.2%
The Fed 26 -7.7% 54 -6.9%
Banks & Nonbanks 360 7.0% 714 8.2%
Deposit-taking banks 164 6.7% 326 8.2%
Nonbanks 168 8.0% 334 8.8%
Activities related to credit intermediation 27 3.8% 53 5.0%
Securities, commodity contracts, and other financial investments 175 3.0% 347 1.5%
Securities and commodity contracts, intermediation & brokerage 80 4.1% 160 2.4%
Securities and commodity exchanges 3 12.2% 6 5.4%
Other financial investment activities 92 1.9% 181 0.6%
Insurance carriers and related activities 720 8.6% 1,424 8.2%
Insurance carriers 622 9.6% 1,228 9.0%
Agencies, brokerages, and other insurance related 98 2.7% 196 3.5%

#2 Biggie: Healthcare and Social Assistance

Healthcare and social assistance revenues are only about half of finance and insurance revenues. However, this sector does not include the goods-portion of healthcare, such as pharmaceutical products, medical devices, supplies, etc. Revenues rose 5.1% in Q2 to $695 billion; and 4.9% year-to-date to $1.37 trillion.

The table below shows the four categories of healthcare services. The largest, “ambulatory health care,” generated $270 billion in revenues in Q2, about half of which are generated by doctors’ offices. Note the much higher growth rates in some segments, such as social assistance, up 6.9% (if your smartphone clips the table, hold the device in landscape position):

Q2 2019, $ billions Change fr. Q2 2018 YTD 2019, $ billions Change fr. YTD 2018
Health care and social assistance 695 5.1% 1,373 4.9%
Ambulatory health care (doctors, diagnostics, outpatient, home health care) 270 3.6% 531 2.9%
Offices of physicians 132 3.3% 259 2.3%
Offices of dentists 33 3.6% * 0.0%
Outpatient care centers 37 5.2% 74 5.4%
Medical and diagnostic laboratories 13 1.3% 26 0.9%
Home health care services 22 2.3% 43 3.3%
Other ambulatory health care services 10 3.0% 19 2.6%
Hospitals 307 5.9% 610 5.9%
General medical and surgical hospitals 286 5.9% 568 6.0%
Psychiatric and substance abuse hospitals 7 2.5% 14 3.0%
Specialty (except psychiatric and substance abuse) hospitals 14 7.5% 28 6.7%
Nursing and residential care facilities 66 6.0% 131 7.0%
Social assistance 52 6.9% 101 7.2%
Individual and family services 27 7.3% 53 8.2%
Community food and housing, and emergency and other relief services 9 6.5% 17 6.5%
Vocational rehabilitation services 4 9.3% 8 7.0%
Childcare services 12 5.5% 23 5.3%

#3 Biggie: Professional services

Revenues grew 4.2% in Q2 to $511 billion; and 4.1% year-to-date to nearly $1 trillion. This sector is dominated by “computer systems design and related services,” which generated $116 billion in the quarter, up 7.1% year-over-year. The second largest segment is “legal services,” as is appropriate for the world’s most litigious society, up 4.2% in Q2 to $83 billion.

Advertising was the only segment in professional services, and one of the few segments in the overall service sector, where revenue growth was negative, for the quarter and year-to-date:

Q2 2019, $ billions Change fr. Q2 2018 YTD 2019, $ billions Change fr. YTD 2018
Professional, scientific, and technical services 511 4.2% 998 4.1%
Legal services 83 1.9% 159 4.4%
Accounting, tax preparation, bookkeeping, payroll services 47 1.8% 102 2.5%
Architectural, engineering, and related services 89 4.6% 172 1.3%
Computer systems design and related services 116 7.1% 226 7.5%
Management, scientific, technical consulting services 71 6.0% 138 4.1%
Scientific research and development services 48 11.5% 92 9.9%
Advertising, public relations, related services 26 -2.1% 50 -2.3%

#4 Biggie: Information Services

Revenues rose 6.1% in Q2 to $430 billion, and 6.4% year-to-date to $847 billion. The sector is dominated by telecommunications, with $157 billion in Q2, up 2.0%. The fastest growing segments were software publishers (+11.4%), data processing services (+13.6%), and other information services (+14.8%):

Q2 2019, $ billions Change fr. Q2 2018 YTD 2019, $ billions Change fr. YTD 2018
Information 430 6.1% 847 6.4%
Publishing industries (except Internet) 93 7.3% 184 8.8%
Newspaper publishers 6 -2.6% 12 -2.3%
Periodical publishers 7 -2.3% 13 -3.8%
Book, directory and mailing list, other publishers 10 -6.0% 18 -4.6%
Software publishers 71 11.4% 141 13.3%
Motion picture and sound recording industries 29 1.8% 56 1.3%
Broadcasting (except Internet) 43 3.3% 85 2.4%
Radio and TV broadcasting 21 7.6% 42 5.7%
Cable and other subscription programming 22 -0.6% 43 -0.7%
Telecommunications 157 2.0% 313 2.2%
Wired carriers 78 0.9% 156 0.7%
Wireless carriers (except satellite) 66 2.2% 132 3.0%
Other telecommunications 13 8.1% 25 7.5%
Data processing, hosting, related services 52 13.6% 100 14.3%
Other information services 56 14.8% 109 15.0%

#5: Transportation services

Ranging from transporting passengers by air to transporting crude oil by pipeline, this sector grew 2% in the quarter to $254 billion and 2.9% year-to-date to $491 billion.

Truck transportation, the sector’s largest segment, experienced declining revenues (-2.2%), which has been clear all year, given the downturn in the industry that is hitting certain corners of it much harder:

Q2 2019, $ billions Change fr. Q2 2018 YTD 2019, $ billions Change fr. YTD 2018
Transportation and warehousing 254 2.0% 491 2.9%
Air transportation 61 4.2% 113 4.1%
Water transportation 12 7.3% 23 8.1%
Truck transportation 74 -2.2% 143 -0.7%
Transit and ground passenger 10 3.4% 21 4.6%
Pipelines 12 3.9% 26 4.9%
Scenic, sightseeing transportation 1 11.0% 2 11.8%
Support activities for transportation 49 0.6% 97 2.4%
Couriers and messengers 25 6.6% 49 5.9%
Warehousing and storage 10 8.0% 19 8.6%

#6: Administrative & Support Services.

Revenues rose 3.1% in the quarter to $229 billion, and 4.5% year-to-date to $451 billion:

Q2 2019, $ billions Change fr. Q2 2018 YTD 2019, $ billions Change fr. YTD 2018
Administrative and support 229 3.1% 451 4.5%
Employment, and travel reservation servies 103 4.7% 209 7.4%
Travel arrangement and reservation services 13 0.9% 25 1.9%
Other administrative and support services 12 2.0% 217 2.1%

#7: Rental and leasing services

Dominated by services related to real estate, the segment grew 6.6% in the quarter, to $187 billion (this does not include the cost of the product, such as the leased car or house, but only services related to the leases):

Q2 2019, $ billions Change fr. Q2 2018 YTD 2019, $ billions Change fr. YTD 2018
Rental and leasing, real estate, auto, etc. 187 6.6% 356 6.0%
Real estate 128 6.6% 245 6.5%
Lessors of real estate 71 5.7% 140 6.2%
Offices of real estate agents and brokers 30 2.9% 53 2.8%
Activities related to real estate 28 13.4% 52 11.1%
Rental and leasing services 45 6.4% 86 5.2%
Auto, truck, equipment rental & leasing 17 7.3% 32 6.2%
Consumer goods rental 6 4.5% 12 3.5%
Commercial, industrial machinery, equipment 21 6.6% 41 5.1%
Lessors of nonfinancial intangible assets  (except copyrighted works) 13 7.5% 24 4.8%

#8 Utilities

This measure of services provided by utilities does not include government-owned utilities but only privately-owned utilities. And it only includes revenues from services, such as line charges for distribution, etc., but not revenues from the products (such as natural gas), and revenue growth from those services wasn’t so hot:

Q2 2019, $ billions Change fr. Q2 2018 YTD 2019, $ billions Change fr. YTD 2018
Utilities 136 -1.8% 291 -0.1%
Electric power generation, transmission and distribution 112 -1.7% 226 -0.2%
Natural gas distribution 20 -3.2% 58 0.0%
Water, sewage and other systems 4 1.0% 7 0.2%

#9: Arts, entertainment, and recreation:

Q2 2019, $ billions Change fr. Q2 2018 YTD 2019, $ billions Change fr. YTD 2018
Arts, entertainment, and recreation 74 6.5% 140 7.4%
Performing arts, spectator sports,  & related 31 0.9% 59 6.2%
Performing arts companies 5 -2.5% 9 3.2%
Spectator sports 11 -2.3% 20 1.1%
Promoters of performing arts, sports, and similar events 9 14.8% 15 13.9%
Agents, managers for artists, athletes,  entertainers, and other public figures 2 4.1% 5 14.0%
Independent artists, writers, and performers
Museums, historical sites, and similar  4 -0.3% 8 1.8%
Amusement, gambling, and recreation industries 38 12.4% 73 9.1%

#10: Accommodation Services.

This is not exactly a high-growth area. Last year, for the full year, it was the only sector that booked a revenue decline.

Q2 2019, $ billions Change fr. Q2 2018 YTD 2019, $ billions Change fr. YTD 2018
Accommodation, traveler and RVs 65 1.2% 124 2.0%
Traveler accommodation 63 1.1% 121 1.9%
RV (recreational vehicle) parks and recreational camps 2 4.6% 3 5.7%

Some other services.

Waste Management and Remediation, small, but fast-growing (the Census sticks this somewhat incongruously under Administrative Services):

Q2 2019, $ billions Change fr. Q2 2018 YTD 2019, $ billions Change fr. YTD 2018
Waste management and remediation services  27 7.2% 52 6.4%

The hodgepodge of services that don’t fit anywhere else in the Census Bureau’s lineup, experienced declining revenues overall, and in three out of four segments:

Q2 2019, $ billions Change fr. Q2 2018 YTD 2019, $ billions Change fr. YTD 2018
Other services (except public administration) 147 -3.1% 551 -1.1%
Repair and maintenance 44 -2.0% 181 2.9%
Death care services 5 -1.5% 19 -3.1%
Drycleaning and laundry services 8 9.4% 30 9.6%
Religious, grantmaking, civic, professional, similar organizations 72 -7.6% 252 -6.3%

None of this data is adjusted for inflation. So, the 5.5% service revenue growth so far this year would be lower in “real” terms, with the CPI for services at the end of Q2 rising by 2.6% compared to a year earlier.

And a recession?

Most of the private-sector services experienced strong revenue growth. Finance and insurance, with a growth rate of 7.0% in Q1, came out on top as the fastest growing component of the service sector, always pushing the financialization of everything to the next level.

The goods-based sector, which is much smaller and more volatile, can pull the economy easily into a low-growth phase, but for the economy to sink into a recession, service revenue growth would need to slow down significantly. It won’t have to drop into the negative, but it would have to get closer to stall speed. And that is not happening yet.

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Wolf Richter is based in San Francisco. Entrepreneur with over twenty years of C-level operations experience, including turnarounds and startups.
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