The Production-Service Jobs Balance

February 28, 2025

Doug Leyendecker

Welcome to This Week’s Leyendecker View

Take care of the many who, for no fault of their own, get the short straws in life. They deserve better.
–Warren Buffett

FAVORITE READS OF THE WEEK

Give your kids this book NOW!
Tim Cook and Bill Ackerman highly endorse it.

An Open Letter to the Next Generation of Artists

THINKING OUT LOUD

The Production-Service Jobs Balance

Last week, I wrote about the jobs AI could put at risk and the jobs AI could create. Embedded in that analysis was a formula to which we might not give enough attention: the relationship between goods producing and service providing jobs.

I started thinking about this relationship around 2008/2009, when the US housing crisis launched a global financial crisis that almost took down our fiat currency world. At the time, I was digging through the various job categories on the Bureau of Labor Statistics (BLS) website. A thought came to mind, one that would go on to serve as the foundation to how I look at the economy and jobs to this day. It goes like this…

There are only three ways all of us spend our time:

Productive activity
Leisure
Life maintenance

The earnings we make from productive activity provide us the time and money to afford our leisure and life maintenance.

As I pondered this composite of how every human spends his or her time, I came to the conclusion that the economy has a similar formula.

BLS job data can be sliced and diced into myriad categories, but there are two macro categories: goods production jobs and service providing jobs. In BLS terms, every job fits into one of those two categories.

In my analogy, goods production jobs and industries are an economy’s productive activity, and service providing jobs and industries are an economy’s leisure and life maintenance.

Manufacturing, energy, construction, tech products and a few others are goods producing industries. Professional services, financial services, government, travel, entertainment and many others are service providing industries.

As I suggested in last week’s essay, the current ratio of goods production to service providing jobs is 1 to 6.3. In essence, 1 goods producing job “supports” 6.3 service providing jobs.

But there’s a rub here, one I started to ponder after 2008/2009…

How many of today’s service providing jobs have been created as a result of our country’s massive fiscal and monetary stimulus? Meaning, how many are born of artificial demand? And for that matter, how many goods producing jobs are also born of stimulus?

The best benchmark I can think of to attempt to answer these questions is to compare today’s goods producing to service producing jobs ratio—one tied to decades of massive stimulus—to the ratio when we last balanced the federal budget.

I asked my “friend” Claude—the AI tool I wrote about last week—this question, to which “he” instantly responded, “In 2000, when Clinton and a bipartisan Congress balanced the budget, the ratio was 1 goods producing job to 4.4 service providing jobs.”

Is it fair to assume that because the ratio was 1 to 4.4 when the budget was balanced, it is the optimal ratio, the ideal? Is this the ratio that, if we could achieve it, would finally liberate us from having to add more and more to the national debt?

If only it were that simple. There are other influences involved.

As an example, the goods production of today’s modern technologies have extremely high gross margins, which waterfall down into technology workers’ wages and capital gains for investors. In turn, higher wages and investment gains translate into more wealth available for higher services consumption.

If modern tech continues to get cheaper to produce, such that economies of scale continue to create unprecedented levels of wealth, then perhaps we have entered an era where 1 goods production job can sustainably support more service providing jobs than historical data might suggest.

Time will tell. But the upshot here is that goods production generates the margins and capital gains that feed the consumption of services. By its very definition, service jobs need to serve something, and that ultimate something is goods production.

Service industry jobs, of course, produce their own revenue, margins, wages and capital gains that are in turn used to purchase both goods and services. But we need to keep in mind that an economy where services serve services that serve other services can only be sustainable so long as there are sufficient goods producing jobs to keep on feeding service jobs. The balance may be an ever-evolving target, but a well-balanced jobs economy is the goal.

THE RANDOMS

If massive layoffs come to federal workers, will it trigger a recession?

Sure enough, as I speculated last week, Trump tells Chevron it no longer can do business in Venezuela.

Inflation, interest rates, the federal debt, the deep state, a politicized judiciary, cancel culture, free speech, globalization, nationalism, populism, climate change, immigration, abortion, woke culture, artificial intelligence, jobs, the economy, the stock market, crypto, Ukraine, the Middle East, NATO, Russia, China, Iran, North Korea, Venezuela, and what else? How in the world can anyone fix all these broken worlds? Yet Trump is actually trying to fix all of them at once. Good luck with that.

The fundamental truth about artificial intelligence: Although it may not turn the world upside down, the people and companies who use it to increase productivity will get ahead of the people and companies who do not.

After using Claude for last week’s essay, I wonder why anyone needs Google anymore. Maybe Google understands this.

Germany’s legacy political powers are snubbing their growing number of voters on the right. Sounds like they are creating fertile ground for a large backlash unless the new governing coalition can quickly stop Germany’s economic slide. Is Germany about to experience a “Biden backlash” of their own?

By the way, 83% of Germans voted in last Sunday’s election. As a contrast, 63.9% of US voters turned out for our last presidential election.

Compared to the public sector, private sector capital is much more disciplined in choosing investments and much more demanding about the returns. The best public sector capital can do is prop up a faltering economy or throw darts and hope something productive comes from the money spent.

Are the great innovators of today the technologists or the chefs?

ECONOMIC NEWS

Economy
Remember when we were talking about recession?

US GDP holds steady
Consumer confidence takes a big fall
Texas manufacturing activity stumbles
Rich people dominate US consumption

Labor
Who will hire laid-off government workers?

Trump wants giant federal worker layoffs
Immigrants in key US industries
Welcome to the world of AI coworkers
More robots are replacing human labor

BUSINESS

Finance
Warren Buffett rules!

Zero emissions PE bets have zero returns
Warren Buffett’s annual letter
Buffett proudly pays taxes
And doesn’t care where you went to school
JPM joins private credit bonanza

Real Estate
Homebuilding market is yucky.

Rents in Austin are tumbling
Home prices up 3.9%
Median age of home buyers is 56
January homes sales fell 4.9%
Zoning ruined blue state housing market

Tech
Is a gold rush bust coming?