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The Industrial Evolution

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK (TheStreet) -- For decades, many U.S. investors have feared the decline of American manufacturing. Some point to manufacturing's falling share of the economy, others to the loss of U.S. manufacturing jobs. However, a close look at global data shows America remains a manufacturing powerhouse and leads a worldwide wave of productivity gains.

It's true manufacturing's share of U.S. GDP has fallen over time -- but this is in line with global trends (Exhibit 1). Moreover, it doesn't mean the US is making less. American manufacturing output has risen substantially on an absolute basis, and the US remained the world's largest manufacturer on an inflation-adjusted basis as of 2010 (Exhibit 2).

Exhibit 1: Manufacturing as a Percentage of Nominal GDP, 1970-2010

Source: United Nations Statistics Division

Exhibit 2: Real Manufacturing Output, 1970-2010

Source: United Nations Statistics Division



Over the past 40 years, U.S. manufacturing output has more than doubled -- the world's fastest growth rate outside China. But China's robust growth (or leadership in nominal output, as of 2010) needn't detract from America's output -- manufacturing isn't zero sum. Aside from the 2007-2009 recession, U.S. and Chinese manufacturing have grown in tandem -- there appears to be ample demand globally to fuel growth in both nations.

Context is also important. The U.S. and China finished 2010 in a manufacturing photo-finish, but total U.S. output, adjusted for inflation, more than tripled China's (Exhibit 3). The U.S., like most developed countries, has evolved into a more diverse, largely services-oriented economy (while still being a manufacturing powerhouse). Throughout history, economies have typically progressed from agrarian to industrial to service. China, which has evolved from agrarian to industrial since economic reforms began in the late 1970s, is less far along -- whether it, too, becomes a more services-based economy will depend on many factors, like whether its communist government continues liberalizing the economy.

Exhibit 3: Real GDP, 1970-2010

Source: United Nations Statistics Division



Of course, none of this means U.S. manufacturing workers have had it easy. Manufacturing output has increased, but the sector's share of total employment has fallen over time. This is partly because many jobs have shifted to markets where labor's cheaper -- including China, where manufacturing employment dwarfs all other nations. Yet many manufacturing jobs have stayed in the U.S., migrating to the service sector. As shown in Exhibit 4, rising service-sector employment has roughly mirrored manufacturing employment declines since 1971 -- evidence of America's economic evolution, and in line with developed nations globally (Exhibit 5).

Exhibit 4: US Service and Manufacturing Employment, 1971-2010

Source: St. Louis Fed

Exhibit 5: Developed World Service and Manufacturing Employment, 1971-2010

Source: St. Louis Fed

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