When business consultant Peter Cleaveland traveled around the country, he could see the trouble. There was massive overbuilding of shopping malls and new stores. Cleaveland, a retailing expert with the firm of Kurt Salmon Associates, knew that construction was outpacing population growth. The bubble was bound to burst.
Well, it has. Overbuilding of stores is but one symptom that the boom in the economy's service sector is slowly collapsing. In the early 1980s, heavy industry faced factory closings. Now the same process of layoffs and retrenchment -- although milder and less visible -- is coming to services: that vast hodgepodge of businesses that account for 75 percent of nonfarm jobs. The squeeze reflects a shift in the economy away from consumer spending (which favors services) and toward exports (which helps manufacturers).
What's familiar is the good news-bad news message of the earlier squeeze on manufacturers. Jobs vanish, careers are disrupted. We lose a sense of security and stability. But adversity may force companies to streamline. That's what happened in manufacturing, and it may now occur in services. Because services represent so much of the national economy -- everything from airlines to hospitals -- this is a significant development. Greater efficiency is the only path to higher national living standards.
You can best glimpse the service slump on Wall Street, which had its own bonanza in the bull market of the 1980s. Black Monday burst that bubble, and now brokerage houses are scaling back. Shearson Lehman Bros. merged with E.F. Hutton, eliminating up to 5,000 jobs in the process. But Wall Street is not alone. Banks are retrenching; Manufacturers Hanover is eliminating 8.5 percent of its jobs. Television networks and fast-food chains face cost-cutting pressures. The advertising industry is beset by mergers and unhappy clients; in 1987, customers shifted $1.2 billion of advertising to new agencies, says Advertising Age.
The service sector suffers from an undeserved inferiority complex. It's viewed pejoratively as a collection of unskilled janitors and secretaries, sprinkled with some parasitic lawyers and investment bankers. No one makes anything useful, like a car. This simplistic mythology presumes that delivering the car to the dealer (a service), selling it (a service), financing it (a service), insuring it (a service) or repairing it (a service) are all unessential jobs.
What is disturbing is the service sector's dismal productivity growth. Threatened by foreign competition, manufacturers improved dramatically. Between 1980 and 1986, factory labor productivity -- output per hour worked -- rose at an annual rate of 4.1 percent, far faster than in the 1970s (2.5 percent) or in the 1947-to-1969 period (2.8 percent). Meanwhile, the service sector did worse. Productivity gains in the 1980s have averaged only 1 percent annually, lower than in the 1970s (1.5 percent) or in the 1947-1969 period (2.3 percent).
Of course, some service industries excel; communications is a standout. Other services defy improvements: you can't automate a string quartet, as Labor Department economist Lawrence Fulco says. Productivity -- which measures output -- is also a slippery concept. It can't accurately describe services where quality is as important as quantity. Health care and education are obvious examples.
But these problems don't fully explain the poor performance. One mystery: why haven't computers helped more? Between 1980 and 1987, personal-computer sales (of units costing more than $1,000) totaled 13 million; sales of more expensive "mini" computers were nearly four times greater than in the 1970s. The net effect of this computer binge on measured productivity is "not much -- at least, not yet," as economist Stephen Roach of Morgan Stanley concludes.
No one really knows why. Companies build huge information bureaucracies, speculates economist Lester Thurow of the Massachusetts Institute of Technology. Computers encourage number-crunching and memo-writing that increase costs but don't improve decision making. Some companies may have also gone through an expensive learning process. Any computer savings may have been offset, perhaps temporarily, by higher training costs.
Some industries clearly miscalculated. Between 1981 and 1985, banks spent $30 billion on new information systems, according to the consultants McKinsey & Co. "The premise was that cost reductions would be passed along to customers -- and customers would love their banks," says Jeffrey Kutler, technology reporter for the American Banker. It didn't work out that way. Computers created new services -- more varied accounts, automatic teller machines -- without eliminating paper-processing costs. In 1986 Americans wrote an estimated 45 billion checks, and the number is rising steadily.
But the service sector's sputtering productivity ultimately reflects more than a gigantic computer glitch. The heart of the problem may be the frenzy of the services boom itself. Between 1982 and 1986, nine of 10 new jobs were in services. Strong consumer spending helped stores, restaurants, airlines, travel agencies and banks (yes, consumer loans are quite profitable). Booms mask mistakes; ambitions become unhinged from reality. The overbuilding of hotels and stores was huge. Economist Michael Sumichrast estimates that 1.5 billion square feet of store space was constructed in the 1980s: that's the equivalent of a store almost twice the size of Miami.
Now the boom is ebbing, and inefficiencies that went unnoticed a few years ago are more glaring. Slowing consumer spending intensifies competition; companies try to improve sales at rivals' expense. Companies may find themselves forced to treat customers better. To keep good employees -- a requisite for improved service -- they may have to pay higher wages. With low unemployment, there's already upward pressure on wages. And service firms must compete for workers with the higher-paying manufacturing sector, which is increasing hiring. Sagging sales and profits are forcing companies to reconsider what they're doing. Ambitions are reappraised. Some operations are overhauled. Others are shut. Weak companies go bust.
It's an unsettling process: maybe when it's over, we'll all be a little better off.