Manufacturing’s Declining Share of GDP is a Global Phenomenon, and It’s Something to Celebrate

March 22, 2012

In a new study from the Innovation Technology and Innovation Foundation (ITIF), (“Worse Than the Great Depression: What Experts Are Missing About American Manufacturing Decline”) the authors make this statement in the introduction:

Even if economic policy experts acknowledge that manufacturing’s share of output has declined, many comfort themselves with a narrative that such decline comes as the inevitable result of market forces.

The authors go on to argue that the policy experts would be wise to consult actual data, for they would find that while manufacturing has declined as a share of GDP in some nations (notably Canada, Italy, Spain, the United Kingdom, and the United States), it is stable or even growing in many others (including Austria, China, Finland, Germany, Japan, Korea, the Netherlands, and Switzerland). 

Based on the United Nations data on international manufacturing and GDP that the authors cite in Endnote #170, some of those statements are not consistent with the factual record. The chart above shows the manufacturing shares of GDP for Japan, Germany, the U.S., the Netherlands, Finland, and the entire world economy from 1970 to 2010, using current national currency units for the countries and current U.S. dollars for the world.  For all five countries and for the world economy, the manufacturing shares of GDP fell to historic all-time lows in 2009, before increasing slightly in all cases in 2010.  

Manufacturing’s declining share of GDP in the U.S., from 24.3% in 1970 to 12.8% in 2010, is not unique to the U.S. economy, but reflects a global phenomenon, at least for many advanced economies like the one cited in the study (Canada, Italy, Spain, the U.K., and the U.S.) and even for four of the countries incorrectly cited by the authors as having manufacturing sectors that are stable or growing: Japan, Germany, Finland and the Netherlands.   

It’s also interesting to note that the decline in manufacturing’s share of U.S. GDP over the last forty years is nearly identical to the decline in world manufacturing as a share of world GDP, which fell from 26.6% in 1970 to 16.2% in 2010. Therefore, we can conclude that the declining share of manufacturing’s contribution to GDP is not unique to America, but reflects a global trend as the world moves from a traditional manufacturing-intensive “Machine Age” economy to more a services-intensive “Information Age” economy. 

In that case, even if the U.S. was a closed economy with no competition from foreign manufacturers, it would have been inevitable that manufacturing’s share of national income and employment would have followed exactly the same downward trend that prevailed over the last forty years, as the U.S. economy evolved into a modern service-based economy. When we complain that "nothing is made here anymore," it's not so much that somebody else is manufacturing the goods that used to be made here as it is the case that we (and others around the world) just don't need as much "stuff" any more in relation to the overall size of the economy.

Yet by failing to recognize the global trend in manufacturing’s declining share of world GDP, the authors of the ITIF study come to a much different conclusion: 

The loss of U.S. manufacturing is not due to some inexorable shift to a post-industrial economy; it is due to a failure of U.S. policies (for example, underinvestment in manufacturing technology support policies and a corporate tax rate that is increasingly uncompetitive) and the expansion of other nations’ mercantilist policies.

An alternative explanation is that we really are experiencing an inevitable shift to a post-industrial, Information Age economy where manufacturing’s importance to output and jobs is declining, similar to the trend in agriculture over the last century. 

Manufacturing’s declining share of output isn’t a sign of economic weakness—it’s just the opposite. It’s a sign that advances in manufacturing productivity and efficiency are translating into lower prices for consumers when they purchase things like cars, food, clothing, appliances, furniture, and electronic goods. In the U.S., the price of goods relative to services fell by 52 percent between 1970 and 2010, so it’s not surprising that manufacturing’s importance in the economy has fallen significantly.

As spending on manufactured goods as a share of household income declines, it raises our standard of living, and for that “decline in manufacturing” we should celebrate, not complain.