Tuesday, May 24, 2011

Manufacturing Efficiency and Falling Consumer Prices = Manufacturing's Falling Share of GDP


The top chart above shows the long-term trends in the shares of GDP for: a) private services-producing industries and b) private goods-producing industries.  From being close to parity in 1947 with services representing 48% of GDP vs. 40% for goods, the services/GDP ratio is now almost 69% compared to the goods/GDP share of less than 18%.  In 1948 there was $1.20 in services produced in the U.S. for every $1 of goods produced, and by 2010, that services-goods ratio had increased to $3.9 to $1. 

The bottom chart above helps explain some of the shift over time from goods to services, by showing that the CPI for services has increased more than the overall CPI by almost 1% per year, while the CPI for durable goods has increased almost 2% less than the overall CPI.  In other words, the real price of services has been rising by almost 1% per year, and the real price of durable goods has been falling by almost 2% per year.  To put it in perspective: on average, $100 of goods and services purchased in 1947 would have cost $820 by 2010. But consider this difference - $100 of services purchased in 1947 would cost $1,250 today; $100 of durable goods in 1947 would only cost $314 today by comparison.  In other words, manufactured goods are a real bargain and they keep getting cheaper over time.     

What's behind the difference in price trends? Productivity gains in manufacturing have been greater than the gains for services, which has lowered real consumer prices for manufactured goods relative to services, resulting in a lower goods/GDP ratio and a higher services/GDP ratio. The trend for manufacturing of: a) increased productivity leading to b) lower real consumer prices resulting in c) a lower share of GDP follows the same pattern for agriculture over the last two hundred years.  And yet when have you heard anybody talk about "the decline of U.S. farming," or make the claim that "we just don't produce any agricultural products any more"? It's not true for farming, and it's not true for manufacturing.

5 Comments:

At 5/25/2011 9:16 AM, Blogger Jet Beagle said...

"Productivity gains in manufacturing have been greater than the gains for services"

I agree. But I also think that much of the productivity gains in services since 1948 has not been measured.

In 1948:
- most meals were prepared in homes;
- most homeowners or their children mowed their own lawns;
- child care was a task for mothers;
- many car owners maintained and repaired their own cars.

Today, we have transferred much of those non-compensated tasks to paid workers. As a result, tasks which formerly were not included in services labor statistics are now counted.

Suppose government statistics from 1948 had somehow include all the hours and zero compensation of household labor in the services sector. The gains in services over 6 decades would appear much greater than they do.

 
At 5/25/2011 10:01 AM, Blogger Benjamin said...

These are interesting charts, and reflect reality.

I can remember when a family buying a car, television, or other large appliance put a lot of dinner table discussion into the topic, viewed the options, talked with friends, neighbors--it was a big to-do.

Now, I go and buy a TV at Target.

You can see it curbside too--people, when moving, often throw away lamps, radios, etc.

In the long run, I suspect consumer durables become cheaper and cheaper.

We need to reform our legal system, to create a rapid and fair way to make contracts and resolve disputes, sans incredibly expensive lawyers. I suggest standardized legal documents as a first step.

 
At 5/25/2011 1:14 PM, Blogger Ron H. said...

"You can see it curbside too--people, when moving, often throw away lamps, radios, etc. "

So, YOU'RE the guy who dug all that crap out of my trash can & left a mess!

 
At 5/25/2011 1:22 PM, Blogger Ron H. said...

"Today, we have transferred much of those non-compensated tasks to paid workers. As a result, tasks which formerly were not included in services labor statistics are now counted."

This says a lot about how much better off we are today than people were in 1948, when only the wealthy could afford to pay cooks, nannies, gardeners, and mechanics.

 
At 5/25/2011 5:52 PM, Blogger Jet Beagle said...

Ron H: "This says a lot about how much better off we are today than people were in 1948"

I agree, of course.

One reason we're better off - not the only one - is that we've increased the number of women in highly skilled occupations. Sixty years ago, the pool of potential scientists and executives was limited to half the population. Many of our brightest citizens were discouraged due to their gender from seeking highly challenging work.

Today, industry can tap all the best and brightest our nation has available. We've doubled the labor pool for occupations requiring intelligence.

 

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