Will Services Offset Weakness in Manufacturing?

Key Points

  • Economic output can be split into manufacturing and services, but it isn’t 50/50. Services make up more of the economy, jobs, and the stock market.

  • The time has come to focus on services data to get a sense of the overall economic picture. Services are picking up as manufacturing is slowing due to supply problems.

  • The stock market is treating results from service companies differently than those in manufacturing, in this earnings season thus far. This could pose a risk to stocks more than to the economy or jobs, should supply problems deepen or linger longer than expected.

All the news about the threat to the economy from supply problems and soaring input costs for manufacturers, it would be natural to think the world was solely dependent upon making stuff. But, in fact, it is more dependent on doing stuff—and doing stuff is going great.

World of services

Economists split the world’s output (GDP) into two main categories: manufacturing and services (agriculture is now a distant third category). Today, the largest share of the world’s output is services. This hasn’t always been the case. For much of recorded history agriculture was dominant. Manufacturing became dominant with the Industrial Revolution, and only recently has services come to be the leading producer of economic activity. Reflecting the global economy, stocks in services industries make up a larger share of the world’s stock market value than those in manufacturing, as measured by the MSCI World Index.

Services’ share of world: GDP, jobs and stock market

World stock market represented by MSCI World Index.
Source: Charles Schwab, World Bank and Factset data as of 10/22/2021.

Ask anyone where the world’s goods are manufactured, and they are likely to answer “China.” However, even China’s economy has seen services account for more than 50% of GDP in recent years. As output has shifted, so too, have jobs. In 2019, employment in services surpassed 50% of total world employment for the first time.

Rapid rise: most workers now have service jobs

Source: Charles Schwab, World Bank data as of 10/22/2021.