Service-Sector Growth is Deflecting the Downturn, but Cracks are Appearing

As long as the service-based sector of the economy does not slow down too much, the US will stay out of a recession. According to the recently released Commerce Department's Advance Quarterly Selected Services Report, the services that are dominating the US economy represent roughly 74% of GDP, and revenues rose 5.6% year-over-year in the first quarter to $3.94 trillion. The four biggest drivers dominating the growth are Finance and Insurance, Healthcare, Professional and Information services, which accounted for $2.84 trillion in revenue. Here are the biggest segments with revenues and year-over-year growth, not adjusted for inflation:

• Finance and Insurance - $1.262 billion (7.1%)

• Healthcare - $676 billion (4.5%)

• Professional - $487 billion (4.2%)

• Information - $416 billion (6.3%)

• Administrative, Support, Employment and Travel - $247 billion (5.8%)

• Transportation and Warehousing - $236 billion (3.5%)

• Rental and Leasing - $169 billion (5.2%)

•  Utilities - $155 billion (1.2%)

• Arts and Entertainment - $67 billion (10.9%)

• Travel Accommodation - $60 billion (3.7%)

The goods-based sector is what is really taking it on the chin right now, and tariff increases combined with the seemingly perpetual retail decline are not helping. While there is legitimate concern with the effects of downturns in the goods sector, especially when considering the potential systemic effects, the services sector is building the backstop that is preventing the recession. However, a recent IHS Markit report, which combines manufacturing and services, notes that new orders are the softest since October 2009, and, "an additional concern is the spreading of the malaise to the service sector, growth of which slumped in May to one of the weakest since the global financial crisis."

When considering slower growth led by manufacturing, tariffs, inventory pileups, freight volume declines, and the yield-curve flattening and inverting, it is worth keeping antennae up. If an unsuspected spike in the three-month average unemployment hits it is time to brace yourself.