Obsession with Manufacturing

Factory activity caps worst quarter in three years: Markit | Reuters.

Old paradigms die hard. The United States became an economic powerhouse riding the wave of an industrialization boom that started in the early 19th Century not ending until the 60’s. Manufacturing is still seen as the major bellwether of the American economy, but it just is not as important as it used to be.

This is the composition of US GDP according to Wikipedia:

  • Agriculture: 1.1%
  • Manufacturing (Industrial): 22.1%
  • Services: 76.8%

Here is China’s for comparision:

  • Agriculture: 10.2%
  • Manufacturing (Industrial): 46.9%
  • Services: 43%

These numbers tell us a few things. The rich countries all have low levels of agriculture as part of their economies. The largest agricultural producer is China. Most of this production is used to feed itself, often through inefficient subsistence farming. It takes 10.2% of Chinese GDP to do this.

The United States feeds itself using a mere 1.2% of its GDP plus imports from other efficient producers adding only a few tenths of a point to this total.

In gross terms, China’s industrial output is 50% greater than that of the United States, but remember that China has five times as many people. The US specializes in high value added goods like 747s, while these industries are in their infancy in China.

What makes the United States a rich country and China an aspiring rich country is the service industry. Think of all the high wage earners you know. They’re all doctors, lawyers, accountants and other professionals. These are all services.

Over time, a more efficient and productive agricultural and industrial sectors leads to a larger services sector where there is a lot of money to be made. Apple pays much more to its Silicon Valley workforce to design the iPhone than it does to have it built in China.

During this period of muted economic growth we certainly do not want manufacturing employment to decline, but it is not as big a deal as the newspapers make it out to be.

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