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Federal Reserve Bank of Chicago
Is U.S. Manufacturing Disappearing?
August 19, 2010

Manufacturing employment as a share of total employment in the United States has been declining over the past 60 years. In 1950, nearly 31% of nonfarm workers were employed in manufacturing. Since then, the share has been dropping...falling to 28.4% in 1960, 20.7% in 1980, 13.1% in 2000, and 9.1% in 2009.

By 2006, the U.S. economy employed about as many workers in manufacturing as in 1950, just over 14 million. In contrast, the growth of nonfarm employment averaged 1.9% per year.

While employment has changed very little over the past 60 years, output in manufacturing has increased at an annual rate of 3.4%. Manufacturing output in 2007 was over 600% higher than in 1950.

So how was manufacturing output able to surge over the past 60 years with little change in the sector’s employment? The answer can be found by looking at productivity. The increase in both the number and quality of machinery over time, along with technological improvements in production processes and inventory management, have given rise to greater manufacturing sector output at lower unit cost.

Productivity growth in the manufacturing sector has averaged 2.9% over the past 60 years. In essence, this means that manufacturing sector output has risen each and every year by around 2.9%. What took 1,000 workers to produce in 1950 could be produced with 184 workers in 2009.

In 1950, the manufacturing share of the U.S. economy amounted to 27% of nominal GDP, but by 2007 it had fallen to 12.1%. How did a sector that experienced growth at a faster pace than the overall economy become a smaller part of the overall economy? The answer again is productivity growth. The greater efficiency of the manufacturing sector afforded either a slower price increase or an outright decline in the prices.

Advancement in technology leads to productivity gains. U.S. spending on research and development can be used as a proxy for the effort being devoted to developing new technology. On this front, the U.S. appears to be in relatively good shape as we continue to invest heavily in research and development. Research and development averaged 2.5% of our GDP between 1953 and 2008. Between 1999 and 2008, it averaged 2.7%.

Fifty years ago the majority of research and development was being funded by the government, much of it in support of public sector programs. More recently, the private sector has become the major funder—the privately funded share of research and development averaged 36% during the 1960s; 47% in the 1970s; 54% in the 1980s; 66% in the 1990s; and 72% between 2000 and 2008.

I often have the opportunity to tour manufacturing production facilities, and I am impressed by the continuous improvements in technology that companies employ.

The new pieces of equipment are more accurate, faster, more versatile, and less expensive than their predecessors.

The manufacturing sector remains vibrant and innovative. Manufacturing output has been rising at a solid pace over time...highly productive operations can achieve their output goals using fewer workers. Nonetheless, higher productivity has fostered a globally competitive U.S. manufacturing sector with the ability to produce more goods with relatively lower price increases, which has benefited U.S. households and the overall economy.