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The Invisible Powerhouse

A discussion of the link between the service and manufacturing industries.
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Quit worrying -- your city no longer needs smokestacks to survive

A re we kidding ourselves, or can this really work? The question nags at me like a summer-evening mosquito bite I can't quite reach. Just now, I've been talking with Randall W. Eberts, a young economist with the Federal Reserve Bank of Cleveland. Cleveland's economy, Eberts tells me, has been coming back strong. But all the new jobs are in services, not manufacturing. Business services have been growing particularly fast. So have health services. The city's biggest employer is no longer a Fortune 500 company, it's the world-renowned Cleveland Clinic.

Cleveland, I've since learned, is not alone. Pittsburgh lost half its manufacturing jobs between the mid-1960s and the mid-1980s. Never mind: today it's thriving, thanks to a booming service sector. Michigan is doing well too, even though nearly a quarter of a million factory jobs vanished during the past decade. Nationwide, manufacturing employment has stayed roughly constant for several years. The 15.6 million jobs we added between 1980 and 1988 are nearly all in the service sector.

But here's the conundrum. For generations, economists have assumed that manufacturing (or mining or agriculture) provides regions and nations with an economic base. Goods can be sold elsewhere in the country or the world, generating wealth, and part of this wealth can then be spent on the service sector -- on accounting firms, pizza parlors, and so on. By traditional reckoning, service businesses should be shrinking wherever factories are on the decline, and growing only where manufacturing is prospering. The corollary: any place relying too heavily on services for its economic health is building its house on sand.

Today, however, we're standing that manufacturing-service linkage on its head. Services are growing all over the place. Services to business are growing fastest of all, and are growing even where manufacturing seems to be losing ground. Hence that nagging question: can this last? Has the service sector somehow become an independent engine of economic development?

Bill Beyers thinks so.

William B. Beyers is a geographer at the University of Washington. A few years ago he conducted a path-breaking survey of service companies in the Seattle region. Just recently, I knew, he had completed a mammoth study of the business-service sector nationally. Putting my head down, I plowed through his research. Coming up for air, I asked him to walk me through it. Finally -- thanks to Beyers -- I think I understand how drastically our economy has changed over the past decade.

Point one: there's still a link between manufacturing and service growth; it's just not as strong as it used to be. "Remember that manufacturing output has been growing," Beyers cautioned me, "even though manufacturing employment hasn't." The same number of assembly-line workers, in other words, are cranking out more and more goods -- so we still need more truckers, more advertising copywriters, and more data-processing specialists. If manufacturing employment does rise, so much the better. Service employment has grown in every part of the country, according to Beyers's national figures. But growth has been greatest in cities such as Los Angeles that have been adding factory jobs.

Point two: companies that produce goods are buying a lot more services than they used to. Large manufacturing businesses, fancying themselves lean and mean, have let their engineers and cafeteria workers go and are buying those services from independent providers. Smaller manufacturing companies have always had to buy the services outside -- but today there are more such companies, which account for a greater share of our nation's industrial production. The result: a proliferation of new service businesses, which -- in a kind of snowball effect -- themselves buy services. Every new data-processing firm needs an accountant.

Point three: innovations in the service sector encourage companies of all kinds to spend money on services that were unknown or scarce a decade ago. As I write this, INC.'s offices are being wired for a new personal-computer network and soon -- we fervently hope -- will be wired for a new telephone system, complete with voice-mail capabilities. Chances are your own company spends more on security firms, computer consultants, benefits specialists, or word-processing temps than you would have thought possible in 1979. That's the service sector at work.

These three facts alone account for much of the explosion in business-service jobs nationwide. But what about individual regions? Why would cities such as Cleveland or Pittsburgh see so dramatic a drop in factory jobs and an equally dramatic rise in service employment? Beyers's most surprising finding is that services themselves are often exported from one region to another and so can grow regardless of what's happening in the local manufacturing sector.

Beyers's researchers discovered this in their survey of metropolitan Seattle. Screening an initial sample of 2,000 producer-service companies, they found 1,100 who said they did more than 10% of their business outside the area. The researchers then studied this smaller group in depth and found an astonishing degree of national and even international orientation. Architects and engineers in the sample did nearly 40% of their business outside Washington State. Computer-service firms did almost 50%. All told, the 1,100 companies accounted for 84,000 jobs, more than half of them attributable to nonlocal sales. "The number of jobs resulting from these exported services was larger than the number of export-tied manufacturing jobs in the Central Puget Sound region," Beyers wrote. Modern transportation and communications technologies, he concluded, had cut business-service companies loose from the factories they were once tied to -- and had made these companies part of the region's economic base.

From this perspective, the answer to my nagging question is disarmingly simple. Of course service-based growth can continue, so long as the markets for all those exportable services continue to expand. Once you begin shipping services outside your region, they're no different economically from washing machines. You get in trouble only if your customers disappear or if they begin taking their business to the competition.

It's the all-or-nothing assumption that usually trips people in discussions of manufacturing versus services: depending on the point of view, the claim is made either that manufacturing is indispensable to an economy or that it's not needed at all. Any economy as large as the United States's will always need a healthy manufacturing sector, just as any big country needs a healthy agricultural sector. But all an individual region needs for prosperity is a base of industries that attracts dollars from other regions.

Farms and factories can form a part of that base. So can tourist facilities, top-quality health-care institutions, universities -- or a collection of specialized business services such as data processors and consulting engineers. In the future, there are likely to be more people working at these jobs and fewer in the plants.


EMPLOYMENT GROWTH:

It's all services

Jobs (in thousands) by sector 1980 1988

Total employment (nongovernmental) 93,961 109,536

Agriculture 3,364 3,169

Mining 979 753

Construction 6,215 7,603

Manufacturing 21,942 21,320

All services* 61,461 76,691

* Includes transportation, trade, and financial services as well as other services.

Source: Statistical Abstract of the United States, 1989, Department of Labor Statistics.


SEATTLE'S SERVICE EXPORTERS

Services themselves are often exported from one region to another, as this survey of 1,100 producer-service companies in metropolitan Seattle demonstrates.

% of business done:

elsewhere in elsewhere

Washington in U.S.

Industry locally State or world

Communications/utilities 48% 27% 25%

Finance 48 27 25

Insurance 39 18 43

Computer programming, 47 5 48 services

R&D labs 15 3 82

Architects/engineers 46 16 38

Source: Beyers, Alvine, & Johnsen, The Service Economy: Export of Services in the Central Puget Sound Region, 1985. To qualify for inclusion in the sample, a company had to do at least 10% of its business outside the Seattle area.

Last updated: Sep 1, 1989




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