"Decline of Manufacturing" is Global Phenomenon: And Yet the World Is Much Better Off Because of It

By Mark Perry.

The chart above shows manufacturing output as a share of GDP, for both the "world less the U.S." and the U.S. alone, using United Nations data for GDP and its components at current prices in U.S. dollars from 1970 to 2010. We hear all the time from Donald Trump and others about the "decline of U.S. manufacturing," about how nothing is made here any more, and how everything that used to be made here is now made in China and other low wage countries.  An underlying assumption of most of those claims is that if the manufacturing base is shrinking in the U.S. (the "hollowing out of U.S. manufacturing"), that there is an offsetting manufacturing gain that is captured elsewhere in the world, as manufacturing output supposedly shifts from the U.S. to other countries, with world manufacturing remaining constant. 

In reality, the chart above shows that the decline in U.S. manufacturing as share of GDP between 1970 and 2010 is really a global phenomenon as the entire world becomes increasingly a service-based economy.  The manufacturing/GDP ratio in the U.S. fell from 24% to 13% between 1970 and 2010, while the world ratio fell at almost the same rate, from 27% to 16%.   

As a share of GDP, manufacturing has declined in most countries since the 1970s. A few examples: Australia's manufacturing/GDP ratio went from 22% in 1970 to 9.3% in 2010, Brazil's ratio went from 24.5% to 13.5%, Canada's from 19% to 10.5%, Germany's from 31.5% to 18.7%, and Japan's from 35% to 20%.

Bottom Line: When we hear claims that "nothing is made here anymore," it's not really the case that somebody else is making the stuff Americans used to make as it is the case that we (and others around the world) just don't manufacture as much "stuff" any more in relation to the growing levels of national income, which the graph above clearly shows. 

The main reason that the manufacturing/GDP ratio has declined in the U.S. and around the world is that productivity gains for durable goods have significantly lowered the price of those goods relative to: a) the prices of services, and b) household incomes, as I pointed out in this CD post on the "miracle of manufacturing." In other words, the declining manufacturing/GDP ratio reflects declining prices for manufacturing goods, which is a sign of economic progress, not regress.  The standard of living around the world today, along with global wealth and prosperity, are all much, much higher today with manufacturing representing 16% of total world output (including the U.S.) compared to 1970, when it was almost twice as high at almost 27%. And for that progress, we should celebrate, not complain about the "decline of manufacturing."