Manufacturing is the economic activity of turning raw materials, parts and energy into finished or semi-finished goods. It covers everything from food processing, textiles and chemicals to cars, electronics and aircraft. In national accounts it is the main part of the secondary sector, sitting between agriculture and mining on one side and services on the other.
Economists watch manufacturing closely because it tends to have fast productivity growth, heavy investment and a large role in exports. It is also highly cyclical, so factory surveys are among the earliest signals of where the business cycle is heading. Governments shape it through trade rules, tax and, increasingly, industrial policy.
Manufacturing in plain terms
Think of a bakery. Flour, butter and sugar come in through the back door; bread and cakes go out the front. The bakery adds value by mixing, shaping and baking, using ovens it bought years ago and staff who know the recipes.
A country's manufacturing sector is millions of such workshops, only far larger and more complex. A car plant takes in steel, glass and thousands of parts, and sends out finished cars. What counts for the economy is the difference between what the plant pays for its inputs and what the finished goods are worth.
How manufacturing is measured
Statistical agencies measure manufacturing output as value added: sales minus the cost of materials and services bought from other firms. That avoids double counting when a steel mill sells to a carmaker. Manufacturing value added is part of Gross Value Added (GVA) and Gross Domestic Product (GDP). Monthly indices of industrial production track physical output, while business surveys give faster readings. Because factory output reacts quickly to orders, these figures often turn before broader measures of employment and income do.
The best known survey is the Purchasing Managers' Index (PMI). Purchasing managers say whether new orders, output, employment, supplier delivery times and stocks are higher, the same or lower than a month earlier. Each component is turned into a diffusion index:
Here is the percentage of respondents reporting an increase and the percentage reporting no change. If 40 percent say orders rose, 35 percent say they were unchanged and 25 percent say they fell, the index is . A reading above 50 signals expansion and below 50 contraction, which makes the PMI one of the most watched leading indicators.
Where manufacturing happens
Manufacturing has shifted toward Asia over the past four decades. China accounts for roughly 28 to 30 percent of world manufacturing value added according to UN and World Bank data for 2023, far ahead of the United States, Japan, Germany, India and South Korea. The shift was driven by globalization, lower wages, huge investment in factories and ports, and the rise of global supply chains in which parts cross several borders before final assembly.
Richer economies have seen manufacturing's share of employment fall for decades, even where output has kept rising, because automation and specialization mean fewer workers produce more. Many now concentrate on high-value stages such as design, advanced components and machinery, the capital goods that other factories need.
How factories are organized
Modern manufacturing grew out of a few big ideas about production. The division of labor split work into small, repeatable tasks. Mass production used moving lines and standard parts to cut unit costs and gain economies of scale. From the 1970s, Japanese methods known as lean manufacturing and just-in-time production taught firms to cut waste and inventory. Today, robotics, sensors and software are pushing further, sometimes called "Industry 4.0".
Manufacturing and policy
Manufacturing carries political weight beyond its share of GDP. Supporters of active policy argue that factories create skilled jobs, drive innovation and give countries resilience in a crisis, as shortages of masks and chips during the COVID-19 pandemic showed. They point to subsidies for semiconductors and clean energy in the United States, the EU and Asia, and to the use of a tariff to protect an infant industry.
Critics reply that governments are poor at picking winners, that protection raises prices for consumers and other firms, and that services such as software and finance are just as capable of high productivity. Many economists also note that a falling factory share of jobs is a normal sign of development rather than failure. The debate shapes trade disputes, sanctions on strategic technology and the balance between imports and domestic production.