Don't Doubt It: U.S. Manufacturing Is Still Strong

by: Mark J. Perry

The top chart above shows the long-term trends in the shares of GDP for: a) private services-producing industries and b) private goods-producing industries. From being close to parity in 1947 with services representing 48% of GDP vs. 40% for goods, the services/GDP ratio is now almost 69% compared to the goods/GDP share of less than 18%. In 1948 there was $1.20 in services produced in the U.S. for every $1 of goods produced, and by 2010, that services-goods ratio had increased to $3.9-to-$1.

The bottom chart above helps explain some of the shift over time from goods to services, by showing that the CPI for services has increased more than the overall CPI by almost 1% per year, while the CPI for durable goods has increased almost 2% less than the overall CPI. In other words, the real price of services has been rising by almost 1% per year, and the real price of durable goods has been falling by almost 2% per year. To put it in perspective: on average, $100 of goods and services purchased in 1947 would have cost $820 by 2010. But consider this difference - $100 of services purchased in 1947 would cost $1,250 today; $100 of durable goods in 1947 would only cost $314 today by comparison. In other words, manufactured goods are a real bargain and they keep getting cheaper over time.

What's behind the difference in price trends? Productivity gains in manufacturing have been greater than the gains for services, which has lowered real consumer prices for manufactured goods relative to services, resulting in a lower goods/GDP ratio and a higher services/GDP ratio. The trend for manufacturing of: a) increased productivity leading to b) lower real consumer prices resulting in c) a lower share of GDP follows the same pattern for agriculture over the last two hundred years. And yet when have you heard anybody talk about "the decline of U.S. farming," or make the claim that "we just don't produce any agricultural products any more"? It's not true for farming, and it's not true for manufacturing.