As we move into the second half of the 2020s, what is the state of U.S. manufacturing? And what are the key trends shaping the sector’s trajectory in the years ahead? To get some expert perspective, the Manufacturing Executive Podcast sat down with Tom Walstrom, a Principal Business Economist in the Economic Research Department at the Federal Reserve Bank of Chicago.
Walstrom noted that manufacturing has experienced slow growth and even slight declines in recent years, largely due to the dampening effect of high interest rates. “Interest rates make it more expensive to invest, and manufactured goods are largely investment goods,” he explained. “With high interest rates, that’s definitely put a damper on manufacturing activity.”
However, with the Fed now lowering rates, Walstrom expects manufacturing growth to pick up. But zooming out to the longer-term trendline, he pointed to a structural shift in manufacturing’s role in the overall economy. “If you look at the forecasts, I think the longer run forecast is for manufacturing to be growing slower than the economy as a whole,” he said. “Manufacturing as a share of GDP has been falling, and it’s something that’s been going on for decades.”
Indeed, manufacturing’s share of U.S. GDP peaked at around 30% in the 1950s and is now headed toward 10%, with the service sector growing to take its place. Walstrom highlighted a few key service industries that have expanded:
The biggest gainer is education and health services. Both have grown a lot. The other big sectors that have grown are professional and business services – some of this is the growth of the tech sector, which has really grown a lot and taken over share. The other one that’s kind of interesting is leisure and hospitality, which you know, think of that as restaurants and hotels and entertainment.
This structural transformation, Walstrom emphasized, is a global phenomenon as countries develop and households get wealthier. “Wealthier households spend a smaller share of their incomes on physical things and a greater share of their incomes on services,” he explained. “It’s something that’s baked into the cake. It’s a fact of economic development that as we get richer, we move away from goods and towards services in how we spend our incomes.”
To track these economic shifts, the Federal Reserve relies on both quantitative data and qualitative research, like the anecdotal information gathered for its Beige Book report. “We spend a lot of time talking to manufacturers,” said Walstrom. “The reason we like to talk to manufacturers is they often have really great insight into what’s going on in manufacturing as a whole because there’s just a lot of trading that goes on before we get to those final goods.”
For those in the manufacturing sector who want to participate in the Fed’s research, Walstrom pointed to the Chicago Fed Survey of Economic Conditions. “It’s a monthly survey where we ask people to tell us about your business’s sales and employment levels, costs and prices, just key performance indicators,” he said. “It’s a way for you to give us feedback on what you’re seeing in the economy so that we can make better policy decisions.”
Looking specifically at the outlook for manufacturing in the Midwest, Walstrom noted that the region’s concentration in the industry means it will likely continue to grow a bit slower than the U.S. overall. But he remains optimistic about the sector’s future.
“I still think manufacturing is really important. It’s certainly important to the Midwest,” he emphasized. “There are still lots of great opportunities in manufacturing to do great work and to keep investing and improving. It’s a global industry with global competition, and it’s as important as ever for the U.S. manufacturing sector to be healthy and strong.”
