Charting The Incredible Shift From Manufacturing To Services In America

By Doug Short, Advisor Perspectives

Business Insider, September 5, 2011

In honor of Labor Day, which was signed into law as a national holiday in 1894, I spent some time this morning studying a topic I’ve occasionally mentioned: The shift in the United States from a manufacturing to a services economy.

The Department of Labor’s Bureau of Labor Statistics has monthly data on employment by industry categories reaching back to 1939. The first chart below is an overlay of the compete series of employment numbers for the two major categories, manufacturing and services.

When I say major, I’m referring to the complete domination of the labor market by these two industries. To illustrate this fact, I’ve also included the total of the two categories and a dotted line showing total nonfarm employment.

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In 1939 service industries employed more people than manufacturing by a ratio of 2.1-to-1.0. But that ratio was soon to change. For a clearer picture of the relative growth of manufacturing and services, the next chart illustrates just that: The cumulative growth of the two series, along with total nonfarm employment.

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During WWII, manufacturing employment rose dramatically, but it began returning to its pre-war pattern after the war ended. Thereafter, manufacturing employment has had a complex history with a peak in the late 1970s and a secular decline thereafter. Here are some observations about manufacturing and services over the past seven plus decades:

  • Manufacturing is far more sensitive to the business cycle. Compare, for example, the relative behavior of manufacturing and services relative to the recession bars.
  • Growth in services began accelerating in the 1960s and accelerated again after the double-dip recession in the early 1980.
  • Manufacturing accelerated at a slower pace in the 1960s and then oscillated around a flat line in sync with the four recessions from 1970 to 1982.
  • Manufacturing employment peaked in June 1979. It never recovered from the double dip recession of 1980-1982.
  • The spring of 1998 was the an interim high for manufacturing jobs, but with the recession of 2001 began a 35% decline in jobs from the 1998 peak to the trough (so far) in December 2009. Manufacturing has essentially flatlined over the past 21 months.

Services industry employment began leveling off with the onset of the 2001 recession. Growth began accelerating again in 2004, but the rate of growth was well below what we saw in the 1980s and 1990s. Services employment hit its all-time peak in January 2008, the second month of the Great Recession. Services employment is slowly improving, but it remains about 2.6% below the 2008 peak.

Doug Short is the vice president of research at Advisor Perspectives.

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