Services vs. Manufacturing

In 2021, services accounted for about 77.6 percent of the American GDP. We can say with confidence that the United States, formerly a manufacturing powerhouse, is now primarily a service economy. Is that a good thing?

Maturation or decadence?

One position on this question is that a service economy is more mature than a manufacturing economy. A civilization starts with agriculture, growing raw materials. Later, it moves on to manufacturing, changing those raw materials into more specialized and valuable goods, like granulated sugar. Finally, it develops into a more sophisticated service economy, stirring sugar into frapuccinos and cocktails for customers who transform that energy into manicures and algorithms.

The other position is that manufacturing is the source of innovation, productivity, and good wages, while the service sector leaves everyone eking out a meager living by taking in each other’s washing.

Pluses and minuses

There are advantages and disadvantages in both directions, even if you disregard the abstract positions. Service industries often have lower up-front costs and better ROI than manufacturing. On the other hand, they also often pay lower wages and exacerbate income inequality. Services are also usually the first area of economization in tough times.

Manufacturing can be harmful to the environment and physically taxing. Jobs in this sector usually pay better, but they can be lost to offshoring and automation.

What assets are available?

Which approach is better can depend on the assets available. Singapore has limited natural resources and space for factories, but an educated workforce than can be leveraged for high-tech knowledge-based work. Services are more likely to work out well for them — and indeed financial services are the cornerstone of their economy. Precision engineering is the key strength in their manufacturing sector, with electronics in the fore.

Italy, on the other hand, has the natural resources to produce top-quality fashion and machinery. China has lots of natural resources and a very large workforce. This otherwise dissimilar countries are both very reliant on manufacturing.

What about the United States?

A balance between services and manufacturing might make the best sense for the United States. The U.S. as a whole now has about 8% of workers employed in manufacturing, for less than the 12% that used to be standard. But there are quite a few states, including Arkansas, Idaho, Wisconsin, and Ohio, that still have more than 12%.

Manufacturing offers better wages to people with less education — many young people work as baristas when they could make four times as much in manufacturing. It also creates greater productivity and leads to more innovation in the U.S. than other sectors do.

Yet modern consumers spend more of their discretionary income on services than they do on manufactured goods. This trend shows no sign of changing or even slowing down, especially as digital goods replace so many consumer products, starting with books, games, maps, and music.

In the final analysis, we may need both. But we may need to work harder to hold onto manufacturing.