Services

By: Dr. M. Ray Perryman
Published in syndication August 31, 2022

Despite the importance of its energy, food, and fiber, the Texas economy is increasingly services oriented. This outcome is not surprising given the sophisticated nature of the state's industrial base; it's a pattern common to every highly developed economy. Let's examine past and expected future trends.

You can basically think of private-sector activity as falling into two big buckets – goods-producing and services-producing industries. Goods-producing sectors include manufacturing, construction, agriculture, and mining (which encompasses oil and gas extraction). Services is everything else.

Twenty years ago, services comprised approximately 63% of employment and almost 55% of real gross product (RGP) in Texas. In 2021, we estimate that it had grown to 69% of employment and about 60% of RGP. Twenty years from now, our projections indicate that it will be nearly 73% of employment and still about 60% of RGP.

The reason that the services share of RGP is lower than for employment is simply because it is possible to create a lot of output in some goods-producing industries with relatively few workers. In an automated manufacturing facility, for example, a few people can monitor equipment producing many products. Similarly, a relatively small number of employees can maintain massively valuable oil and gas production once a well is completed. By contrast, many jobs in services firms are person-to-person in nature, while others don't lend themselves to automation. My late friend and great economist William Baumol once noted that it would be exceedingly difficult for two people to play a string quartet.

The services sector includes a diverse set of industries. Professional and business services involve fields such as, among others, accounting and law firms, engineering and consulting companies, and advertising agencies. Health care is included, as is the entire wholesale and retail trade segment. Education, transportation, amusements and recreation, hospitality, restaurants, and financial services are also significant components.

Some of the fastest growth has been experienced in transportation and warehousing, where employment is up almost 62% over the past 20 years. Several categories of financial services have also expanded by 60% or more, including insurance carriers. Professional and business services, education, waste management and remediation, ambulatory health care, and social assistance have also seen strong gains.

Looking ahead, we are projecting that the fastest pace of expansion will occur in social assistance and waste management and remediation, though the professional and business services category will generate the largest number of net new positions.

Over time, the jobs will continue to be created at a more rapid pace in services-producing industries. The composition of occupations will certainly change as the economy evolves and technology alters the character and skills requirements of every job, but the overall pattern is well established. Stay safe!