Does Growth in Services Point to a Stronger U.S. Economy?


The news that U.S. hiring slowed in July was greeted with a groan by observers, but indicators suggest the economy in both the U.S. and China may be strengthening. In fact, the growth in China’s service industries in the second quarter represented a turnaround. Added to the expectations of economists and Berkshire Hathaway’s (NYSE:BRK.A) earnings, there is reason to believe better times are ahead.

Bloomberg reports China’s service industries rose for the first time since the third quarter of 2012, while other figures indicate the manufacturing sector also grew in China. While the overall growth of 7.5 percent year over year represented a slowdown, there was plenty to like about the report for Chinese economists.

Speculation among 60 economists surveyed by Bloomberg shows they expected similar results from the U.S. service industries. Though hiring decreased in the month of July, notching the lowest amount in several months, the news outlet reported that the Institute for Supply Management’s index of jobs outside the manufacturing sector is expected to rise, if only modestly. Indeed, the numbers in retail were the most encouraging.

Scanning Labor Department data, the 47,000 workers hired for retail work in July suggest the services sector has momentum. The figure amounted to more than 25 percent of the total hiring in the U.S. in July. Economists are waiting for the actual figures to be released, but the forecast from the group surveyed by Bloomberg would reflect a complement to confidence in the manufacturing sector at large.

On that front, news from Warren Buffett’s camp showed positives on both sides of the equation. Berkshire Hathaway’s spectacular earnings report was mostly driven by gains in investments by the conglomerate. Yet the manufacturing side showed gains, as well. According to Fortune, the company’s manufacturing business grew 8 percent in the second quarter while its railroad business notched 7 percent gains compared to last year.

That growth was supported by news that General Electric’s (NYSE:GE) order backlog was strong in the second quarter — encouraging news that came in late July. Between Berkshire Hathaway and GE, the two Fortune 500 mainstays are considered an indicator of things to come. And if the expected good news about service industries in the U.S. comes, economists will be more confident about the trajectory.

For years, analysts have pointed out the shift in the U.S. from a manufacturing economy to a more service-oriented focus, yet both sides are important for the rebound in the U.S. to succeed. Analysts told Bloomberg the combination is especially important at the moment: as construction produces new homes, the new occupants look for services and increase purchasing.

Reports of expansion in retail would indicate the average person has more money to spend, creating the demand that smaller workforces couldn’t handle. In essence, that would indicate the feared effects of budget cuts and increases in payroll taxes haven’t been that bad. Unless Americans have figured out how to budget their money more wisely, it would indicate the average citizen is better off and willing to put that money back into the economy.

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