05/31/2024
The Little Engine of Economic Growth
The "Locomotive Engine" of the U.S. economy continues to forge ahead, seemingly fueled only by the hopeful mantra, "I think I can." This takes me back to my Wall Street days, where I was taught, "Hope is not a strategy." So, how can we explain the economy's persistence in chugging along in the face of adversity?
There is no shortage of concerning news. Inflation has significantly increased the cost of living for Americans, with a staggering 20% surge over the past three and a half years. Housing affordability is near its worst point ever, and automobile insurance rates have experienced an unprecedented 46% hike since pre-COVID times. Add to this mix the weight of wars, civil unrest, and anemic wage growth, which has left half of the country's citizens barely scraping by, living paycheck to paycheck. The situation appears, to say the least, unsettling.
Yet, amidst this gloomy landscape, if we look hard enough, we still can find a nugget of optimism—a "golden lining" concealed within the chaos. Within this hidden potential, America holds the key to unlocking a better future for the U.S. economy.
Our nation has evolved from the 17th-century Agrarian Revolution through the first, second, third, and fourth Industrial Revolutions. Now, we stand on the brink of entering the fifth Industrial Revolution, powered by artificial intelligence.
A two-hundred-year span passed until we entered the Third Industrial Revolution in the 1970s. Up to this point, the goods sector (manufacturing, mining, agriculture, forestry, fishing, hunting, and construction) was the driver of economic growth.
Notice the crossover intersection between the goods and services sectors. At the turn of World War II, the goods sector comprised 39% of our total output; today, that percentage of total Gross Domestic Product has dwindled to 22%. The goods sector (automobiles, housing, durables: appliances, furniture, machinery) is more sensitive to rising interest rates and cyclical downturns.
Since the 1970s, the services sector has taken the baton as the driver of America's economic locomotive engine. Look at the crossover; the services sector has grown from 25% of total GDP to 46% now. The U.S. economy generates $28.2 trillion in total output each year; services account for $13 trillion of that amount.
Source: BEA
As society has evolved, healthcare, retail, entertainment, and finance services have taken center stage in the economy. America has shown resilience when faced with economic sputters or inflation, as our focus has shifted from manufacturing to providing services.
Technological advances have streamlined the production of goods, reducing the workforce needed for manufacturing. This shift has freed people to offer valuable services that meet consumers' growing needs and desires.
Services such as healthcare and education are essential and provide a stable economic foundation. Moreover, the service sector often drives innovation, especially with the advent of digital and internet-based services.
As economies develop and technology progresses, the service sector becomes the backbone of the world's most powerful economies. We've clearly transitioned from "Making Things to Doing Things," prioritizing the provision of services over the production of goods.
So, the next time you visit a service provider or have a technician fixing a problem at your house, therein lies the muscle that has pushed the S&P 500 total return forward and upward at an 11.6% compounded annual rate over the past decade.
Have a wonderful weekend,
—Chip
