The United States has run a trade deficit (importing more goods and services from other countries than it exports) since the mid-1970s. Although the trade deficit narrows during recessions — imports typically fall faster than exports during a recession — the trade gap has increased over time, and currently stands at around 3.5% of gross domestic product (GDP) [Figure 1]. This large and persistent trade deficit acts as a drag on overall GDP growth, since sales of exports are added to GDP, while purchases of imports are subtracted. Along with our massive budget deficit, the trade deficit is one of the major economic challenges facing the United States and has fostered the oft repeated conventional wisdom that “we don’t make anything in this country anymore,” or “everything I buy or own is made in China.” In this week’s Weekly Economic Commentary, we focus on the details of what we import and export and how that impacts the U.S. labor market. Inside Look at U.S. Trade Deficit The trade deficit is computed by adding up the value of all the goods and services made in the United States and shipped to other countries, and subtracting the value of all the goods and services from abroad purchased in the U.S. Our large deficit on the goods side (around $759 billion in 2012*) more than offsets the trade surplus (around $213 billion in 2012) we have on the service side of the ledger. Combined, our goods and services trade deficit was $547 billion in 2012. The composition of the deficit on the goods side (what we import) contributes to the notion that “we don’t make anything in the U.S. anymore,” while the “hidden” surplus on the service side gets little attention.
Trade Surplus and Where the Jobs Are
Figure 2 helps to illustrate the point that where we have a trade surplus (in the service sector), we create jobs, and relatively high paying jobs. As noted previously, the United States ran a $759 billion trade deficit in the goods sector in 2012. Just 1 million jobs have been added in the goods-producing sector since the trough in the labor market in early 2010. The median hourly wage in the goods-producing sector is $26.05. In contrast, we run a $213 billion trade surplus in the service sector, where 6.4 million jobs have been added since the February 2010 nadir in employment. In addition, in the areas where we have the largest service sector trade advantage (professional and technical services, motion pictures, broadcasting, performing arts and sports, insurance carriers, securities, commodities and investments, data processing and hosting, etc.) the median hourly wage ($32.91) is more than 25% above the median hourly wage in manufacturing, construction, and mining and natural resources ($26.05). In general, the jobs in the export-oriented service sector require more advanced skills, and, in most cases, advanced education and training.
That is not to say that the goods-manufacturing sector is not creating any new jobs or will not create any in the coming years. Indeed, aided by much cheaper energy inputs, a flexible and well-educated labor force, a high unemployment rate, and higher quality control standards, along with some well-placed “arm twisting” from federal, state, and local governments, a few bright spots have emerged in the manufacturing economy in recent years. The sector has created 530,000 jobs since the trough in employment in early 2010, the best performance over a similar time frame since 1998, and more jobs in this area are likely on the way. The caveat here is that 95% of the manufacturing jobs created since early 2010 have been in durable manufacturing (autos and light trucks, appliances, fabricated metal products, and machinery), all areas that mostly require advanced skills. Just a handful of jobs have been created in the non-durable manufacturing area, where the United States does not have a particular competitive
advantage.
Consumer and Consumer-Related Items Dominate U.S.
Goods Imports
The list of our top 10 imported items is full of consumer and consumer related items like apparel, computers and electronic equipment, transportation equipment, oil and gas, petroleum and coal, and the somewhat deceiving “miscellaneous manufactured goods” category. This category of imported goods — which includes household items like jewelry, sporting goods, toys and games, office supplies, etc. — is found in the grocery stores and big box discount stores we shop in every day. We imported $102 billion of these goods in 2012 and exported just $44 billion. Although this category is not the main driver of our overall trade deficit, it is certainly one of the most visible manifestations of it, and contributes to the overall perception that “we don’t make anything here anymore.” Employment in this area of manufacturing peaked in 1978 at around 7 million workers. Today, only 4.5 million people are employed in the manufacturing of non-durable goods.
U.S. Service Exports Are Growing Rapidly
What is not as visible to most Americans (and to most pundits and media outlets) is that the United States is a net exporter of services, and that our service exports are growing rapidly, as consumers and businesses around the world demand America’s intellectual property and expertise — and culture too. Service exports were at an all-time high in 2012, and have more than doubled in the past 10 years. Eighty percent of U.S. jobs are service related, and although much is made of the maligned “hamburger flipper” service job, many U.S. service-related jobs require advanced degrees and advanced skills, and help to make possible our booming business in service exports.
Good Old American Know-How in Demand
Our top service export, business, professional, and technical services, is a fancy name for good old American know-how. At $153 billion, this would have been our fifth-largest export in 2012. It includes fields ranging from education, oil field services, and entertainment, to advertising, computer and data processing services, and database and other information services, as well as research, development, and testing services.
This category of exports is basically invisible to average Americans unless they (or someone they know) work in these fields. Nearly 19 million Americans (16% of overall employment in the United States) are employed in this category of service exports, and, unlike most other measures of employment, this category has completely recovered from the Great Recession. Of course, not all of those 19 million jobs are tied to exports, but a sizable portion is.
Exporting Hollywood
Another service export category that stands out is royalties, license fees, copyrights, and broadcast rights, with $124 billion of exports in 2012 [Figure 3]. This includes fees earned by U.S. television networks and movie studios selling licenses to foreign media outlets for overseas broadcasts of TV shows like CSI, Family Guy, Jersey Shore, Law and Order, The Big Bang Theory, ICarly and, of course, the Super Bowl, and movies like Iron Man 3, Despicable Me, Monsters University, and Fast and Furious. It also includes U.S. firms like Microsoft, Apple, Oracle, and Cisco licensing their software for use overseas. Similarly, U.S. companies garnered $43 billion in fees in 2012 by selling their patented manufacturing processes to overseas firms. Financial services (investment banking, advisory fees, trading, trust, custody, etc.) provided by Wall Street investment banks and other large commercial banks netted $76 billion in fees in 2012.
Foreigners who visited the United States in 2012 spent a whopping $126 billion on hotels, rental cars, and other goods and services while they were here, far outstripping the $83 billion American travelers spent abroad. Looking at combined goods and services export categories, travel would rank sixth. We also ran a huge trade surplus in education, where foreign students spent $25 billion in 2012 to study in the United States, while U.S. students spend just $6 billion to study at overseas colleges and universities.
With the exception of insurance services and freight and port services, the United States enjoys a trade surplus in every major category of services. Most major service export categories have experienced near 10% growth per year over the past 10 years, driven higher by fast-growing emerging market economies eager to consume good old American know-how, along with American culture (TV, movies, Times Square, Hollywood, and Disney World), and expertise ranging from accounting to software and, of course, our world-renowned colleges and universities. In short, the United States is still one of the world’s largest exporters of goods and services, and our fastest-growing exports (services) aren’t always as visible as some of the items we import and consume every day.
Looking ahead, our competitive advantage in the service sector, including good old American know-how, should help to continue to drive employment higher in this sector, especially in areas that require advanced skills. Our reliance on exports (and employment) in the less volatile service sector, which continue to be in high demand in fast-growing emerging markets worldwide, should help to promote longer U.S. economic expansions and less dependence on the boom-and-bust inventory cycles that accompany more goods-based export-dependent economies around the world. American “know-how” is our most abundant resource and should continue to make the United States an attractive destination for the world’s capital.
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IMPORTANT DISCLOSURES
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
Gross domestic product (GDP) is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory.
Purchasing Managers’ Index (PMI) is an indicator of the economic health of the manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.
Quantitative easing is a government monetary policy occasionally used to increase the money supply by buying government securities or other securities from the market. Quantitative easing increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity.
Markit is a leading, global financial information services company that provides independent data, valuations and trade processing across all asset classes in order to enhance transparency, reduce risk and improve operational efficiency. The Markit Purchasing Managers’ IndexT (PMIT) is a composite index based on five of the individual indexes with the following weights: New Orders – 0.3, Output – 0.25, Employment – 0.2, Suppliers’ Delivery Times – 0.15, Stocks of Items Purchased – 0.1, with the Delivery Times Index inverted so that it moves in a comparable direction.
This research material has been prepared by LPL Financial.
To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to such entity.
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Garrett & Robinson 
Health Care Checkup
October 1, 2013
What We Spend on Health Care
This week, health care is likely to be in the news as a key component of the 2010 Affordable Care Act (ACA). Enrollment for individuals seeking insurance coverage takes effect on October 1, as members of Congress continue to debate the merits (and funding) of the law as part of the discussion around providing funding for the federal government. We’ll leave the pros and cons of the ACA to the politicians and pundits and focus instead on the size and scope of the health care sector in the U.S. economy. In future Weekly Economic Commentaries, we’ll explore the impact of health care on the labor market, various segments of the economy, the federal budget, inflation, and the impact of demographics on health care spending. On balance, how we (as individuals and as an economy) consume, pay for, and manage the cost of health care will play a crucial role not only in the economy, but in the federal budget in the years and decades to come.
How We’re Covered
Most, though not all, of the spending patterns discussed below are driven by what type of health insurance, if any, individuals have. Using data compiled by the non-partisan Congressional Budget Office (CBO), which assigns people to their primary source of insurance (many people have multiple sources of insurance, especially those eligible for Medicare who also purchase additional insurance), we find that 156 million people (or 57% of the non-elderly population) have employment-based health insurance. By 2023, the CBO projects that this figure will increase to 162 million but will remain at 57% of the non-elderly population. At 57 million, or 21% of the non-elderly population, the uninsured made up the second-largest portion of the population in 2012. The CBO projects that under current law, the number of uninsured will drop to 31 million or 11% of the non-elderly population by 2023. More people are likely to move onto Medicaid and to the government-run health insurance exchanges as prescribed by the ACA while those purchasing non-group insurance will remain roughly steady at 8% of the non-elderly population. This potential shift in how Americans purchase health insurance has major implications for the overall economy and the outlook for the budget, which we’ll discuss in depth in future editions of the Weekly Economic Commentary.
How We Spend Our Health Care Dollars
Economy-wide (federal, state, and local governments, corporations, and individuals), Americans spent $2.7 trillion (or roughly 18% of gross domestic product [GDP]) on health care products, services, and investment in 2011, the latest data available.
To put that in perspective, only three countries, China, Japan, and Germany, have economies larger than $2.7 trillion. Ten years ago, the figure was closer to 15% of GDP, and 30 years ago (1982) health care represented less than 10% of GDP. The rise in the percentage of the economy accounted for by health care is because spending on health care has risen much faster than GDP. Over the last 10 years, for example, health care spending has increased at a 5.5% annualized rate while overall GDP has increased at only a 4.0% pace. Although the aging population has played a role in this increase, and will continue to for many decades to come, health care spending per capita has increased 5% per year over the past 10 years to nearly $9,000, suggesting that even without the demographic shift, we are spending more on health care than ever before.
Of the $2.7 trillion spent economy-wide on health care in 2011, about one-third is on hospital services, another 25% is on professional services (doctors, dentists, clinics), and 15% is on medical products, including pharmaceuticals, medical equipment, and medical supplies. $308 billion is spent by individuals out of pocket on health care, more than is spent by individuals on new passenger cars and light trucks (approximately $240 billion in 2012), furniture and appliances (~$275 billion), or clothing (~$290 billion). Health insurance pays for another $2 trillion in health care expenses. Private insurance covers $900 billion of that $2 trillion, Medicare insurance for the elderly covers $550 billion, and Medicaid insurance for the poor covers $400 billion. The surprise here is that out-of-pocket expenses (~$300 billion) as a percent of total health care expenditures ($2.7 trillion) are just 11%, and have been moving lower for more than five decades.
As noted above, we’ll discuss the impact of health care spending on the federal budget in a future edition of the Weekly Economic Commentary, but it’s important to note that the portion of health care spending economywide “sponsored” by governments has risen steadily over the past 25 years and is projected to continue to increase over the next 10 years and beyond, as the population ages and more people move into Medicare.
Allocation of Health Care Dollars Shifting Toward Government
In 1987, 68% of health care spending was initiated by the private sector (private businesses, households, and health-related philanthropic organizations), with one-third coming from businesses and roughly twothirds from households. Within the private sector, the ratio between businesses (one-third) and household spending (two-thirds) has remained relatively steady over the past 25 years. In 2012, just 55% of health care spending was initiated by the private sector, down from 68% in 1987, while government (federal, state, and local) accounted for 45%, up from 32% in 1987. This trend is expected to rise over the next 10 years.
Business spending in this context includes:
Household spending on health care includes:
Shifts in the mix of spending by businesses and consumers on various aspects of health care will continue to impact the economy for many years to come, and hopefully inform policy choices about who pays and how much is paid for health care in the coming decades.
Because the U.S. government is paying an ever-increasing share of health care costs, and more businesses and individuals are paying less out of pocket for health care, the actual cost and quality of health care is not as transparent as it should be. For example, we are likely to know far more about the cost and quality of the house we’re going to buy, the car we’re going to lease, and the vacation we’re going to take than we often do about our health care purchases. The overall cost of health care, combined with the lack of transparency throughout the system, will likely remain ongoing concerns for health care policymakers in the coming years and decades.
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IMPORTANT DISCLOSURES
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
Stock investing involves risk including loss of principal.
Gross domestic product (GDP) is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory.
The Congressional Budget Office is a non-partisan arm of Congress, established in 1974, to provide Congress with non-partisan scoring of budget proposals.
This research material has been prepared by LPL Financial.
To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to such entity.
Not FDIC/NCUA Insured | Not Bank/Credit Union Guaranteed | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit
Member FINRA/SIPC
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