THE U.S. SERVICE ECONOMY IS IN THE RED ZONE

Even the most begrudging observer realizes that the nation has pretty much ceded industrial production to offshore locations.  And, while it comes as welcome news that President Trump is working hard to bring jobs back to our steel, coal, and manufacturing industries it is doubtful that the trajectory of a slow and gradual decline in jobs can substantially be reversed. The nation has been on such a path for decades – manufacturing jobs peaked in 1979 and have never recovered since – but the indifference, if not outright hostility, visited by the Obama administration on the industrial heartland worsened the condition of these industries to near the point of no return.

SERVICES: THE NEW SACRIFICIAL LAMB OF THE ECONOMY

We are now marooned on an island of service activities. Approximately 80% of our GDP and 80% of our employment base is engaged in services. We have no choice but to fight our way out. If the United States is to avoid a nuclear winter in its service industries it has no choice but to excel in services, do so at globally competitive prices, and do so now. Business and government policies need to be crafted consistent with this emerging challenge to our sovereignty or the consequences will be dire.

We are no longer playing a domestic zero-sum game. The threat now is that if we lose business to an offshore location we may stand no chance of recovering that lost business. Exhibit A is manufacturing: the door has been slammed shut on American manufacturing. As to services, the most we can say is that the door remains uncomfortably ajar.

If manufacturing slipped away from the United States in a generation, it won’t take nearly as long for service activities—more easily outsourceable than manufacturing ever was—to disappear from our shores. Few service activities are immune to the outsourcing threat. The process, unfortunately, is already well on its way not just in low value-add areas but in high-impact corridors such as the life sciences, software engineering, product design, technical support, telecommunications, computer, information services, research and development, and management consulting. It is distressing, and we should take note, that the balance of payments difference between exports and imports in these vital areas is now a horse race – in 2017 our exports totaled $196 billion while imports came in at about $144 billion – with little margin for error. If we were the economic powerhouse we believe we are this would be no contest.

VALUE CREATION IS NOT THE SAME AS WEALTH CREATION

The oft-cited GDP statistic as a barometer of our nation’s economic health is misplaced. Gross Domestic Product is a measure of the nation’s income not of its wealth. And, even though we are the world’s leading producer of goods and services, as measured by the GDP, there is little to crow about. The GDP of the United States at about $19 trillion, is saddled with debt of about $20 trillion. Furthermore, the nation’s annual GDP growth has been stuck at a 2% range with recent spikes at 3%. At those rates the economy will do little more than tread water.

Wealth is the sustenance of a nation and it cannot be created unless the nation builds things like automobiles, robots, computer programs, artificial intelligence, bridges, dams or discovers new oil fields. And, if our industrial outlook remains predictably grim wealth creation must of necessity come from our service activities. Pulling that rabbit out of a hat, however, will require a true illusionist.

Most of the sectors which make up the services component of our GDP might create value but they do not create wealth for the nation. At this stage of our economic development wealth can only be created by leveraging human and investment capital in high-impact, knowledge-based industries. microelectronics, biotechnology, tele-communications, space technology, and information processing are industries that hold the key for our success in the twenty-first century. Ceding any ground in these industries to offshore locations will have us on the outside looking in as we are now doing in manufacturing.

Management Advisor

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