Suddenly, Services Aren't Such World Beaters

The Japanese have their electronics, the Germans their engineering. But when it comes to command of global markets, the U.S. owns the service sector. It's the world leader in exporting everything from data security to crowd control. Such global supremacy allowed exports of U.S. services to grow at a double-digit annual clip as recently as 1991--one of the few bright spots in the U.S. trade picture.

The party seems to be winding down, though. For the first half of 1995, as U.S. exports in manufactured and farm goods jumped 16.3%, service exports climbed a measly 5.4% (chart). Service exports have actually stalled since last September, at around $17 billion per month. That's putting the brakes on what was a key growth engine for U.S. trade.

POLITICAL FALLOUT. These numbers have potentially explosive political ramifications. The annual surplus in services--expected to hit $60 billion this year--typically offsets a third of America's huge and growing deficit in goods trade. With service exports stagnating, the overall U.S. trade deficit in goods is projected to balloon to a record $188 billion this year. And the yawning trade gap could well give new ammunition to economic nationalists such as GOP Presidential contender Patrick J. Buchanan, who opposes Bill Clinton's drive to lower trade barriers worldwide.

Politics aside, however, just how significant are the new numbers? Oddly enough, the way government bean counters tally the totals, an important factor in the slowdown could be only temporary. Tourism accounts for about 30% of the U.S.'s service exports: Every hotel stay by a foreign traveler to the U.S. adds to the total. Even with the dollar at historically low levels, the Travel Industry Assn. expects a 4% drop in tourism to the U.S. this year, led by a falloff of 9% of visitors from Canada and a 15% drop in Mexican visitors. Those numbers, of course, are likely to improve as the Canadian and Mexican economies rebound.

More troubling is weakness in another category of service exports, which includes consulting, advertising, and engineering services performed from a U.S. office for an overseas client. In the first six months of this year, growth in that sector, which also accounts for about 30% of total services exports, was running at just 4.4%, down from 8.1% in the first half of last year.

However, puzzling out the reasons for the drop-off is tough because the category is a catch-all of business services. Many companies are doing well: Hollywood is having a banner year abroad, for instance. But sluggish overseas economies are taking a toll on others. For example, a survey by Engineering News Record found that foreign billings for U.S. engineering companies fell to $3.5 billion in 1994, 31% less than the previous year. The main reason: a plunge in commissions from the Middle East. Foreign puchases of U.S. equities were off earlier this year, too.

More generally, after years of explosive growth, many economists argue that the slowdown is inevitable. "Service exports shot up from a low base in past years, and growth has been phenomenal," notes Lehman Brothers Inc. economist Allen Sinai.

In purely economic terms, though, the effects of the service slump may be far less worrisome than politicians would have people believe. Under the government's definitions, all sorts of activities abroad--from McDonald's hamburger sales in Moscow to ads created abroad for a foreign client--don't count in the trade report. Many economists think the government simply misses many key foreign billings by U.S. companies because the numbers are so hard to track. "Everyone knows that service exports are mismeasured and often not tallied," says J. David Richardson, a visiting fellow at the Institute for International Economics in Washington.

Still, the trend in the numbers is clear, and troubling if it lasts. Clintonites still dream of filling the trade gap with an ever-growing services surplus. They may be in for a rude awakening.

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