Control Panel: Focus on services

Investment Analysis Clubs Macro Economic Trends and Risks
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President Trump’s emphasis on tariffs puts the focus on manufacturing which has a large international trade deficit.

But services are actually 80% of GDP and have an international trade surplus. Based on the latest data from the U.S. Bureau of Economic Analysis (BEA), the U.S. services trade surplus for the past year (the 12 months ending in May 2025) was approximately $308.9 billion. That ain’t chicken feed! U.S. GDP is $30 Trillion so the services trade surplus is 1% of GDP.

Cheap goods imports have suppressed inflation for a long time. Services have higher inflation. Based on data from the U.S. Bureau of Labor Statistics (BLS), services inflation for the past year (the 12 months ending in June 2025) was 3.6%.

Economic activity in the services sector grew in July for the second consecutive month, say the nation’s purchasing and supply executives in the latest Services ISM® Report On Business®. The Employment Index was in contraction territory for the second month in a row and the fourth time in the last five months. The Prices Index registered 69.9 percent in July, a 2.4-percentage point increase from June’s reading of 67.5 percent. The index has exceeded 60 percent for eight straight months, with July’s reading the highest since October 2022 (70.7 percent).https://www.ismworld.org/supply-management-news-and-reports/reports/ism-report-on-business/services/july/

The Federal Reserve will be watching this carefully. Their dual mandate is to maintain full employment and they are trying to bring inflation down to 2.0% The Fed is under intense pressure from President Trump to slash the fed funds rate. Trump just appointed a “loyal” new fed governor to replace one who quit. That will tend to tip the balance toward fed fund cuts.

The options market now predicts a 90% chance of a fed funds cut in September. Also strong likelihood of cuts in October and December.

At the same time, the Atlanta Fed’s Inflation Nowcast predicts Quarterly annualized percent change for 2025:Q3 PCE of 2.71%. This is well above their goal and has been rising through 2025. And Trump’s tariffs haven’t begun to bite yet.

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The Atlanta Fed’s GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2025 was 2.5 percent on August 7. The combination of a reasonably strong economic growth and higher-than-desired inflation doesn’t give a reason to cut the fed funds rate.

The fed funds rate is a short-term (overnight) rate. This may apply to stock margin accounts which is at a record high, over $1 Trillion for the first time. Margin correlates with the stock indexes.

The Chicago Fed’s National Financial Conditions Index (NFCI), which provides a comprehensive weekly update on U.S. financial conditions in money markets, debt and equity markets, and the traditional and “shadow” banking systems, shows financial conditions are extremely loose. This is providing a wave of lending that is inflating the asset bubbles.

The market sets the longer-term bond yields that underpin the mortgage market and so much more. Treasury yields suddenly dropped this week but that is probably noise.

President Trump caused tremendous worry in the bond market last week when he fired the director of the BLS because he didn’t like the job numbers. The BLS also calculates inflation figures. The $2 trillion market in Treasury Inflation-Protected Securities could crack if U.S. inflation data are politicized. CPI is also used to calculate Social Security COLAs so it directly impacts millions of retirees.

https://tipswatch.com/2025/08/10/tips-investors-fa…

The SPX and Nasdaq indexes rose last week. The Fear & Greed index moved into Greed. The trade is returning to risk-on.

Copper, which jumped a couple of weeks ago, suddenly plunged. I don’t know why.

Gold and silver are gradually rising, with noise. USD is gradually sinking with noise. Oil may have peaked near the top of its 1-year channel.

The Trump tariffs are due to bite in August. So far the stock market isn’t reacting.

The METAR for next week is sunny.

Wendy

https://www.cmegroup.com/markets/interest-rates/cm…

https://www.atlantafed.org/cqer/research/gdpnow

https://www.finra.org/rules-guidance/key-topics/ma…

https://www.chicagofed.org/research/data/nfci/curr…

https://stockcharts.com/freecharts/candleglance.ht…

https://stockcharts.com/freecharts/candleglance.ht…

https://stockcharts.com/freecharts/candleglance.ht…

https://stockcharts.com/freecharts/yieldcurve.php

https://www.cnn.com/markets/fear-and-greed

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Because manufacturing “jobs” appeal to the “base” with relatively little education. Meanwhile, a lot of better educated people will find their “knowledge jobs” offshored or automated.

The first couple rifs at WPI were interesting, because the scythe cut deepest in middle management, not the people who actually got things done.

Steve

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How do you import/export services, barbers, food, plumbing, mowing the lawn. Tourism and over the air help desks would be exceptions.

Are “knowledge jobs” services? Would an “ignorance job” not be a service?

The Captain

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[My knee jerk reaction to the current chaos is “tariffs bad, trump bad, etc bad. So I started trying to try to understand…]

Let me preface by trying to describe what I “think” Trump/team is saying about tariffs (and trade barriers).

IMO, from a 30k ft POV, Trump and crew are saying that OVERALL, there are trade RESTRICTIONS that preclude “free trade” FROM the US and US providers to other countries.

AND that the US allows other countries to sell into the US market with few (or no) restrictions.

Trump et al want to reduce these “restrictions”… or make them “equal (zit for zat)”.

I’m using the term “restrictions” to conceptually include “tariffs, regulations, bureaucratic requirements, border crossings, bribes, etc” that impede “free” flow.

We “know” from the mainstream media hand wringing, that Trump is putting tariffs on material goods imported into the US from other countries.

We “know” that other countries have tariffs on material goods exported from the US to those other countries.

But. How is the flow of SERVICES “restricted”?

I asked Claude Sonnet 4.

(Standard caveat: Claude can make mistakes. Please double-check responses.)

While traditional tariffs don’t apply to services the way they do to goods, other countries do impose significant trade barriers on U.S. service exports.

Here’s how services are restricted:

Services Aren’t Subject to Tariffs, But Face Other Barriers

Although services are not subject to tariffs, they are subject to trade barriers such as nationality and local presence requirements, or opaque or arbitrary regulatory processes. These barriers severely limit the services export potential of U.S. suppliers (TRADING ECONOMICS) .

Common Types of Services Trade Barriers Include:

Regulatory Restrictions - Many countries require service providers to establish physical presence, obtain local licenses, or meet nationality requirements to operate. This particularly affects financial services, telecommunications, and professional services.Digital Trade Barriers - The 2023 NTE Report details restrictive data policies in China, the EU, India, Indonesia, Russia, Turkey, and Vietnam, among other countries. USTR will continue to engage foreign governments on policies that significantly affect U.S. exporters of digital products and services and undermine U.S. manufacturers’ and service suppliers’ ability to move data across borders (CNN) . These include data localization requirements and restrictions on cross-border data flows.

Market Access Limitations - Countries may limit foreign ownership of service companies, restrict the number of licenses available to foreign providers, or impose discriminatory regulations.

Professional Services Barriers - Many countries don’t recognize U.S. professional qualifications, require local partnerships, or impose lengthy approval processes for lawyers, accountants, engineers, and other professionals.Financial Services Restrictions - Banking, insurance, and investment services face particular scrutiny, with many countries limiting foreign banks’ operations or requiring local subsidiaries.

Government Procurement Restrictions - Many countries favor domestic service providers for government contracts, limiting opportunities for U.S. consulting, IT, and other business services.

Non-Tariff Barriers are commonly used by High Income countries to restrict trade, whereas other income groups tend to distort trade with Tariffs and Services Restrictions (Statista) .

The U.S. Trade Representative regularly identifies and works to address these barriers through trade negotiations and dispute resolution mechanisms.These non-tariff barriers can be just as effective as traditional tariffs in limiting U.S. service exports, and they’re often more complex to address through trade negotiations.

Yes. The US imposes trade restrictions on services, too.

:thinking:

ralph

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The only case I’m somewhat familiar with is medicine. You cannot practice with a foreign licence but nothing prevents you from getting a local license. i don’t have a problem with that.

The Captain

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Mostly you don’t. We do export financial services, computer services, movies, insurance, legal, music, video game streaming, licensing fees for patents, etc. I would assume Google, Microsoft, Apple, and others in the technology sector do a gigantic business overseas. Amazon too, probably. That’s all “service”, it isn’t just the lawn care guy or the barber.

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I’ll go on record and say I hate it when people make an AI inquiry and post it here.

I often use AI to inform my responses, but they are my responses. In this case, the query missed the entire question and so the output was AI diarrhea that had nothing to do with the original question. But at least it had bolded type.

The issue is the US generally runs a trade deficit. When calculating tariffs and for the purpose of tariffs negotiations, the US only counts deficits in goods, not services.

Claude’s response was if services were restricted. But that’s moot because tariffs are not based on service exports. And Claude didn’t comment on something important for this topic: Do we restrict service imports? The answer is yes.

The AI inquiry should have been why only goods and not services should be included in the balance of accounts? (I didn’t ask).

Serious question. If we are calculating the trade deficit and upending the world order to make it more “fair.” is it reasonable to only include components of trade that make our case, and disregard components that where we have the advantage? I’m guessing no one besides us agrees with that. I’ll take that back. No one agrees with that. I don’t think even we don’t agree with that.

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Maybe we should be asking for total cash flow and credit into and out of the country. There is probably a FRED metric, Balance of Payments?

Cheers
Qazulight

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I completely agree. When I see verbatim copy and paste from AIs, I simply skip over them completely. If I were interested in what an AI has to say, I can talk to an AI directly. Here I am interested in what all you folks have to say, and that’s what I am here for. I recently saw an article that claimed that a large percentage of reddit content is now AI-based. I rarely use reddit, but if that trend continues, I may not be able to use it at all.

This is true, but I think the balance of payments does include services (I think it includes everything).

To be fair, part of the reasoning behind tariffs is that other countries have structures (for example VAT, purchase taxes on many specific items like cars, etc) that make imported products more expensive than sold in the country they are produced in. Take a car as an example. If BMW produces a car for $35,000, they can sell that car in Denmark for $35,000 + 25% VAT + assorted smaller taxes/fees, or about $45,000. And BMW can sell that car in the USA for $35,000 + ~$1500 transport costs, or $36,500. And the buyer will also have to pay sales taxes of 0%-8.75% depending what state they are located in. Meanwhile, when GM produces a car for $35,000, they can only sell it in Denmark for $35,000 + ~$1,500 transport costs + 25% VAT + assorted small taxes/fees, or about $47,000. So European automakers can sell a $35,000 car in the USA for maybe $38,000 or so, while US automakers can sell a $35,000 car in Denmark for maybe $47,000. It’s a lot harder for US automakers to sell cars in Europe than it is for European automakers to sell cars in the US. In addition to regular purchase taxes on vehicles in many places (including Denmark), there are also hefty taxes (often many tens of percentages) based on how large the vehicle is, if we include those, then it is MUCH MUCH more difficult for a US automaker to sell in Europe than it is for a European automaker to sell in the USA. In Italy, there was a much higher tax on cars with engines over 2 liters, so the automakers really specialized in making good engines at 1.999 liters, that’s how things like turbochargers in consumer cars became popular.

Now, when it comes to services, it’s a similar issue, because VAT is charged on services as well. When you buy an app on one of the app stores, or when you buy Windows 11, or any piece of software, or AWS services, or other services, the price includes VAT, and that VAT is remitted to the government by the company selling the service.

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@qazulight @syke6

Essentially, a country’s overall balance of payments is a comprehensive record of all its international economic transactions. The current account, which includes the trade balance, is a major part of this system.

While the trade balance specifically measures the difference between exported and imported goods and services, the current account is a broader measure that also includes:

Net income: Payments and receipts from foreign investments.

Net transfers: Government or private funds that flow in and out of the country, such as foreign aid.

The Bureau of Economic Analysis (BEA) keeps track of trade data. The FRED system publishes charts. Goods has a deficit while services has a surplus. But the deficit in goods is larger than the surplus in services so the total trade balance is a deficit.

The year-to-date figures for the first half of 2025 show that the total goods and services deficit increased by $161.5 billion, or 38.3 percent, from the same period in 2024.

It concerns me a lot that our goods deficit is continually increasing while the services surplus is stagnant. And a lot of those services are intellectual property that can be eroded by our competitors and AI.

The total Current Account (which includes the trade balance as part of it) is negative to the tune of $152 Billion. For comparison, annual GDP is $30 Trillion.

Full disclosure: I did use Google Gemini to get the information for part of this post.

Wendy

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I had/have the same dislike for people posting news articles. BTW, most of the time, after doing a Google search, I click the Web option to hide the AI stuff.

At the current level AI Large Language Models are not trustworthy, they are not fact checked. Science is based on validating opinions, guesses, hypotheses, theories. That is missing in the current level of AI LLMs.

The Captain
Human Intelligence or the lack of it…

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First of all, Denny is absolutely correct. For the stuff I use AI for, over 80% of their initial answers are obviously and blatantly wrong. When I point this out, the AI humbly apologizes and then make another (or the same error).

The error in Mark’s evaluation is that the price of ALL cars are more expensive in Europe than in the US. It is true that US-made cars have to have VAT and other taxes piled onto their base price, but the same is true of their European competitors. US cars tend to have a slight shipping cost advantage in the US (the same as European cars in Europe).

By adding tariffs onto the cost of European cars exported to the US, wee are unilaterally imposing an asymmetric trade barrier which they would be silly to ignore and the appropriate response would be to levee equivalent tariffs on US-made cars exported to Europe.

While ultimately, after trade breaks down (or brakes down, if you prefer), we may sell more US made cars in the US than we lose sales in Europe, the US consumer will have less choice than before (and may suffer the brunt of cost-cutting quality issues which were assumed before imported models with better quality control and design forced US manufactures to improve their game).

Jeff

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Yes, a thousand times yes. (although I did it once or twice at the beginning, but realized how tedious it was for others.)

Likewise. I was trying to find a nice way to say it to people, but I guess direct and to the point is the best.

Disagree here. I can’t read everything everywhere all at once, and if someone finds something interesting I’m glad to have them add it to the pile. If I don’t like it, well I can scroll right past. I add news articles that add weight to the conversation, or, like the thread on Canada & dying, bring up a topic which I think others might find interesting.

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Just guessing, but the hate might be for posting the article at length rather than via a link …

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I agree with your disagreement. It’s impossible to read everything.

Yeah, I don’t like that.

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Because many of the links are behind paywalls it’s better to post the link along with a few paragraphs. It’s not OK to post articles at length because of copyright infringement. TMF used to yank posts with long quotes for that reason – that’s why I’m careful to never post more than 3 paragraphs.

Wendy

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That and I hate naked links too. I like the “traditional” format of a couple lines of comments on the article, followed by a representative quote and the link. You get enough to start a conversation and enough to know if you want to read the article. Very useful. Naked links and long blocks of text, not so much.

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But that wasn’t the point. The primary point was this, here’s the direct quote -

It’s a lot harder for US automakers to sell cars in Europe than it is for European automakers to sell cars in the US.

Because cars are much more expensive in Europe, and much less expensive in the USA, European automakers have an easier time selling cars in the USA than US automakers have selling cars in Europe. So, maybe European automakers can sell a million cars in the USA, while US automakers can only sell 250,000 cars in Europe. That directly leads to a trade deficit (in cars at least). One way to affect (and reduce) that trade deficit is to make European cars more expensive in the USA.

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That may just mean that Europeans buy fewer cars than Americans do (whether US or Euro simply a matter of taste more than price) whether it’s because of lower population, longer ownership, smaller cars purchased (because of price of fuel and difficulty driving/parking in older cities) etc. So you would be penalizing European car manufacturers because their market is smaller? Your argument is that, because Europe taxes all car purchases, we should tax their cars (but not ours) to equalize things?

On a pragmatic level, few US cars have fully US content and that means that US cars will have some level of tariff content as well. That means that all car prices will increase in price in the US (foreign import more than locally produced) and therefore car purchasers will be subsidizing the tax cuts to those in the higher tax brackets by contributing the sales tax we now call a tariff.

I shouldn’t be complaining if car purchasers subsidize my lower taxes, but it is the abject ignorance of much of our population I find bothersome.

Jeff

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Not my argument, rather the argument being used by those who want to use tariffs as a way to reduce trade deficits.

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