The fortunes of the manufacturing sector regularly captures the headlines while service industries are relatively under-reported by the media. Taking the number of articles on FT.com since the start of 2013 on the performance of manufacturing or services, over 600 pieces reported the manufacturing purchasing managers’ indices, while services were covered by about half that number of entries. Half of those pieces reporting the manufacturing PMI did so without any mention of the services sector, while services are almost never reported on their own.
This under-reporting and poor consideration of the services sector contrasts with the reality of contemporary economies for three reasons:
First, the manufacturing sector accounts for a small proportion of advanced economies.
In the UK and in the US manufacturing accounts for only about 10 per cent of total output, while services make up for more than 75 per cent of their economies. The manufacturing share is not much higher in other advanced economies.
Manufacturing is more important in Germany – about 22 per cent of total output – but services still make up more than two thirds of the economy. Only developing economies have larger manufacturing sectors, but the proportion progressively declines with economic development.
Second: Services are driving economic recovery.
The Markit purchasing manager index for developed markets shows that services are expanding much more strongly than manufacturing.
And GDP figures confirm the strong reliance of many advanced economies on their services sector. Real gross value added of manufacturing activities grew by an annual rate of 2 per cent in the UK and 1 per cent in the EU last year. The same figure for professional services was 7 per cent in the UK and 3 per cent in the EU.
Service activities account for almost the totality of positive contributions to economic growth in the third quarter this year in the European Union. Construction had a negative impact on growth, while manufacturing activity – the most reported sector- had a negligible contribution.
This is not a peculiarity of advanced economies. Even in China services are the engine of economic growth and the country is starting a necessary re-balancing process towards service and consumer- led growth.
Third: the distinction between services and manufacturing is vanishing.
The distinction between manufacturing and services should clear, since the first involves a tangible product and the latter doesn’t. But how important is this tangible product in the value of manufacturing production? How much does the actual value of the leather and labour involved producing a Prada handbag weigh in its overall value compared with branding, design, advertising and retailing? The same question could be asked for the cereals you eat in the morning or your smartphone.
Services are used throughout the manufacturing process and the manufacturing value chain. Some services are needed early in the chain (e.g., research and development), some are needed at the end (retailing, maintenance and repair), and some are needed at every stage (telecommunications and financial services). Individual manufacturers often require a full spectrum of services.
More than one third of all input in manufacturing in advanced economies is business services, including transport, financial services, IT and others. The proportion is higher in advanced economies than in China, where “products” input have a larger weight in manufacturing production.
Food and beverages production and vehicles production are more service-intensive than other industries, particularly basic metal industries.
The above figures refer only to the services and products that are sourced externally, but a large part of services are actually produced within manufacturing companies. This is the case of all internal research and development, sales and marketing activities and post-sales support.
So why are we focussed on manufacturing production?
Partially it’s because of a long lasting belief that you can create value only by creating tangible goods. This is deep rooted in our society and it echoes the 18th century physiocrats’ obsession with agriculture. This group of French economists held that only agriculture – or ‘the productive sector’ – can produce value added. Only planting seeds would result in new products been produced, as opposed to manufacturing – the ‘sterile sector’ – where products changed form but nothing additional is created.
Services are not a ‘residual’ sector. They account for the majority of output in advanced economies and are usually the most dynamic part of the economy. They are also a major component of manufacturing production, possibly the one that determines its competitiveness.
It’s about time we give services the space and consideration they deserve.
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