service industry

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The segment of the economy that provides services to its consumers. This includes a wide range of businesses including financial institutions, schools, transports and restaurants.

Also known as "tertiary sector of industry," or "service industry/sector".

Investopedia Says:
The tertiary industry is one of three industry types in a developed economy, the other two being the primary (raw materials) and secondary (goods production) industries. As an economy becomes more developed, it will shift its focus from primary to secondary and tertiary industries.

The tertiary industry is split into two main categories. The first is made up of companies that are in the business of making money, such as those in the financial industry. The second comprises the non-profit segment, wich includes services such as state education.

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In this feature, we take an in-depth look at the various techniques that determine the value and investment quality of companies from an industry perspective. Industry Handbook

From cutting the grass to providing health care to delivering packages, service industries in the United States play an integral part in the daily activities of millions of people and businesses. These services may offer an improved standard of living, professional and technical expertise, or other essential services. The providers of such services involve all sectors of the economy including for-profit private businesses, non-profit organizations and various levels of government.

What Are Service Industries?

The U.S. Department of Commerce's Bureau of Economic Analysis (BEA) measures total national output in terms of Gross National Product (GNP). In measuring output, the BEA also identifies the industry sources of GNP. The BEA broadly defines service industries as those providing products that cannot be stored and are consumed at the place and time of purchase. Generally, these services involve only the performance of actions on behalf of the customer and have little, if any, tangible substance. For example, a theater company staging a play or musical sells customers tickets allowing them to view the theatrical event. Upon completion of the performance, the customers leave with little more than their memory of the actors performing their roles. In some instances, however, the services provided may involve the receipt of a tangible product by the customer. In this instance, the BEA requires that such products contribute minimally to the total cost of the service. An example of this is an automobile service station performing a routine oil change on a car. As part of this service, new oil and an oil filter are provided to the customer.

While some service industry companies such as housekeeping and landscaping contractors sell convenience to their customers, other service industry companies sell professional and technical expertise. Such is the case with tax accountants, who annually complete millions of federal and state tax forms on behalf of their clients. Their clients do not pay for the tax forms that are

U.S. Gross National Product and Service Industry Product

BILLIONS OF DOLLARS

available at no extra cost from the taxing authorities but for the correct completion of such forms. The tax accountant uses client provided information to complete the forms and to determine the client's taxes, applying knowledge of the ever changing tax laws.

Economic Importance

The service industries have and continue to play an important role in the U.S. economy. In terms of productivity, the proportion of the U.S. GNP attributed to service industries has consistently trended upward. As illustrated in Table 1, service industries in 1960 accounted for 39 percent of the U.S. GNP. By 1980, this percentage increased to over 45 percent. In 1997, more than 55 percent of the $8.1 trillion U.S. GNP was attributed to productivity in the service industries.

While the vital role of the service industries to the U.S. economy is evident in their proportion of GNP, their importance is magnified by their contribution to the total employment in the U.S. labor market. As illustrated in Table 2, according to data published in 1997 by the U.S. Department of Labor's Bureau of Labor Statistics (BLS). service industries in 1986 were responsible for two-thirds of total U.S. employment. By 1996, the proportion of the total U.S. employment attributed

Total U.S. Employment, Service Industry Employment, 1986, 1996, and Projections for 2006

THOUSANDS OF JOBS

to service industries rose to more than 70 percent. In 1997, the BLS forecasted service industries would be responsible for virtually all jobgrowth between 1996 and 2006 and would account for nearly 75 percent of total U.S. employment by 2006.

As illustrated in Table 3, the BLS projected that between 1996 and 2006 the ten U.S. industries with the greatest percentage increase in employment would be service industries.

Service Industry Providers

Services available within the United States are provided by all three sectors of the economy: for profit businesses; non-profit organizations; and the government. For-profit businesses provide the largest proportion of all services and account for the greatest number of jobs. The government provides the second largest proportion of services and jobs followed by non-profit organizations.

The profitability of the service and the issue of whether the service benefits non-paying third parties or the community are factors that determine which of the three sectors of the economy provide a particular service. By their very nature, for-profit businesses offer those services that can be profitably produced and avoid services that benefit non-paying third parties. The types of services for-profit businesses provide are numerous and cover a broad array of service categories.

The 10 Industries having Highest Projected Employment Growth, 1996 – 2006

EMPLOYMENT IN THOUSANDS OF JOBS

Some examples include residential, amusement and recreational, financial, and professional consulting services.

The government provides services that offer both tax paying and non-tax paying members of society substantial benefits such as national defense and public education. Another example is governmental regulatory agencies such as the Food and Drug Administration, which ensures the quality of products to be consumed by the public. Society has chosen the government to provide such vitally important services rather than risk inadequate provision by businesses or other organizations. In other service areas, for-profit businesses may not always be self-policing.

Non-profit organizations provide services that improve the overall well-being of society that businesses cannot profitably produce or the government cannot adequately supply. Examples of this are non-profit organizations that offer educational and recreational programs for inner city youth and non-profit hospitals that provide health-related services to all persons regardless of their ability to pay.

Service Industry Categories

Services industries in the United States vary substantially based upon the nature of the service they provide and the customers they serve. In general, the classifications of service industries include business and office, health care, residential care, amusement and recreation, financial, automotive, and educational services.

Within the broad classification of the business and office services industry are those offering services designed to enhance the productivity and profitability of their business clientele. For example, computer and data processing services offer products that improve their clients' processing of paperwork. Management services advise clients on the best management practices. Employment and personnel services assist clients in locating qualified job candidates and provide flexibility without altering their work force. As illustrated in Table 3, several business and office service industries are projected to be among the fastest growing industries beyond the year 2000.

As the life expectancy of Americans continues to grow, so too does the need for health professionals such as physicians and nurses as well as health related services such as nursing homes or in-home health care. During the 1990s, the health care service industry experienced substantial growth, and as Table 3 indicates, the industry is projected to experience substantial growth through the year 2006.

The residential care industry is another area that has experienced substantial growth and is expected, as illustrated in Table 3, to continue to do so beyond the year 2000. The expansion in the residential care industry is caused in part by the growing number of two-income families having limited leisure time. As a result, they employ residential care services to take care of tasks such as lawn-care and house-cleaning.

Amusement and recreation is another service industry that continues to grow at a rapid pace. With disposable income on the rise, Americans are increasing their spending on various forms of amusement such as movies, live theatre, and theme parks. Furthermore, recreational services are expanding as Americans enjoy more active lifestyles, joining health clubs and other sports-related clubs.

The financial services industry includes investment banks, security brokerages, insurance companies, and banking institutions. They provide a broad array of products such as investment counseling. During the 1990s, the financial service industry experienced substantial consolidation as many banks merged with other traditional banks, investment banks, and insurance companies to form multi-function financial institutions.

The automobile service industry maintains and repairs automobiles. It has become increasingly important as the rising cost of new automobiles necessitates maintaining presently owned vehicles for longer periods of time. Furthermore, given the increasing level of technology built into automobiles, even the most basic vehicle maintenance requires work by skilled automotive service technicians.

The educational service industry consists primarily of school based education offered by both public and private institutions. However, increasingly important are also educational institutions that cater to the needs of corporate clientele. These institutions offer corporate training in a variety of areas such as computer technology and foreign languages.

Bibliography

Boustead, Thomas. (1997). "The U.S. Economy to 2006." Monthly Labor Review November: 6-22.

Bowman, Charles. (1997). "BLS Projections to 2006—A Summary." Monthly Labor Review November: 3-5.

The Economic Report of the President. (1999). Washington, DC: U.S. Government Printing Office.

Franklin, James C. (1997). "Industry Output and Employment Projections to 2006." Monthly Labor Review November: 39-57.

National Income and Product Accounts of the United States, 1929-94. Volume 1. (1998). Washington DC: U.S. Department of Commerce.

Silvestri, George T. (1997). "Occupational Employment Projections to 2006." Monthly Labor Review November: 58-83.

Yuskavage, Robert E. (1996). "Improved Estimates of Gross Product by Industry, 1959-94." Survey of Current Business August: 133-155.

[Article by: ALAN G. KRABBENHOFT]

Also known as tertiary industry, this is any of those economic activities, including wholesaling, transport, and retailing, concerned with the distribution and consumption of goods and services. To these may be added administration and, possibly, the provision of information, although some define the latter as quaternary industry.

An industry that produces services rather than goods. Examples include transportation, banking, retail trade, and entertainment.