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Services: Keep the Good Times Rolling
Jan 25, 2001

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  • As US manufacturers sound the alarms of recession, all the more noticeable the importance of the services sector. Services are not only the largest share of most national economies, but they may also help to cushion the effects of manufacturing recessions. As Brian Blackstone of Dow Jones Newswires puts it in article available under the Ideas section of SItrends, a manufacturing recession has less of a chance of spilling into the broader economy than it once did, since the less volatile service sector encompasses a greater share of the economy. The positive benefits do not stop there but actually extend to the contribution that new business services and information technologies make to reducing the length and depth of a manufacturing downturn by eliminating the need for large inventories and allowing firms to adjust faster to changes in demand.

    The experience is not all too new. The EU during most part of the nineties lived with sluggish manufacturing performance while services grew at an average 5% that prevented a wide spread recession. In recent months British manufacturers affected by a strong pound and high interest rates have experienced no growth or negative growth in the second semester of 2000 while services grew at an average 3.3% in the same period. Most of this growth was fostered by the good performance of small and medium size providers of business services.

    In the US, where many claim that consumer confidence is fading personal, expenditure in services raised over 4% in November with respect to the same month the year before. The annual change in consumption by households was the largest annual change in consumer expenditure since 1997. On a monthly basis the increase in spending in services in November was almost 5% above the year average. Judging from consumer behavior one may actually question the extent to which the US economy is headed to a wide recession.

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