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December 12, 2012

6 things to know about the future of manufacturing

(Continued)

Moreover, as wages rise, manufacturers must increase productivity in order to sustain their profits. As a result, manufacturing's share of GDP peaks at 20 to 35 percent in middle-income countries and then falls, following an inverted U curve. Today, manufacturing represents 12 percent of GDP in the United States, 18 percent in Germany, and 33 percent in China.

As they recover from the Great Recession, some advanced economies may see a rebound in hiring in manufacturing. Some might even see moderate export gains. But because of continuing improvements in productivity, the faster growth of service sectors, and the focus on higher-skilled jobs, manufacturing's share of overall employment will remain under pressure.

2. Manufacturing still has a productivity and innovation edge

Even as manufacturing's contribution to growth slows in advanced economies, the sector continues to make outsize contributions in productivity, innovation and trade. In the United States, for example, manufacturing contributes more than twice the expected rate of productivity growth for its level of GDP and employment. One result of this productivity advantage is a massive consumer surplus. While services counted in the U.S. Consumer Price Index have risen by more than 150 percent over the past 25 years, prices of consumer durables (such as cars and refrigerators) have risen by one-tenth of that rate.

Even as advanced economies have shifted toward services, manufacturing continues to lead in innovation. In advanced economies, manufacturing companies fund as much as 90 percent of private-sector research and development. Finally, manufacturing continues to dominate global trade: 70 percent of global exports are manufactured goods. These contributions -- in productivity, innovation and exports -- strongly influence global competitiveness.

3. Manufacturing and services are more intertwined than you think

The notion that manufacturing and services are two completely different economic realms has become increasingly anachronistic. Much of what goes into getting a new kind of soap on the supermarket shelf or putting a new car in the showroom requires a growing number of services. Today in the United States, for every dollar of output, manufacturers purchase 19 cents of services -- everything from trucking and logistics to advertising.

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