How Important Is the Services Sector to the U.S. Economy?

The services sector can be described as the backbone of the U.S. economy. But in what sense, exactly? For starters, the sector accounts for a majority of the nation’s output, jobs and household spending.

“The services sector is, essentially, the bulk of economic activity,” said Ricardo Marto, an economist with the St. Louis Fed. “The bulk of employment and firms are there. Most of the economy nowadays revolves around the services sector.”

In an interview, Marto shared his thoughts on the services sector’s role in the larger economy and its evolution over time. He discussed what the sector contributes to U.S. gross domestic product (GDP), employment and consumer spending—as well as some of the factors that might explain its growth in recent decades. Marto recently published research on this topic, which was highlighted in the FRED Blog.

What Is the Services Sector?

What the economy produces can be broken into two broad sectors: goods and services. Goods—such as furniture, computer hardware or household appliances—are tangible. Services—such as financial advice, truck transportation or visits to the doctor—are intangible.

A common way to distinguish the goods and services sectors is by industry; that is, to divide the U.S. economy into goods-producing industries and service-providing industries, Marto said. The North American Industry Classification System, or NAICS, and its predecessors do just that, he noted. Consider a pair of blue jeans. The factory receiving bolts of raw denim and manufacturing them into pants would be in a goods-producing industry. However, the store retailing those jeans at the mall or online would be in a service-providing industry.

“The most straightforward way to look at it is really through the industries that produce what we usually classify as a service versus a good,” Marto said.

Industry categorization can help researchers study how the economy has transformed over time. Such data show that the services sector—which includes industries ranging from health care and information to professional occupations, real estate and entertainment—is the larger and faster-growing segment of the economy, spurred in part by changes in demand and advances in technology, Marto said. The primary industry in the goods sector is manufacturing.

Services Sector Contributions to GDP, Employment and Consumer Spending

Examining the rise of the services sector compared with the goods sector can provide important context for understanding the economy’s current structure. The services sector’s growth is reflected in its share of GDP, employment and consumer spending.

Services’ Share of GDP

Since the early 1950s, the services sector has expanded from about one-half of U.S. GDP to more than three-quarters of it, according to Marto, and that growth has come both in absolute and relative terms. In other words, if the economy were a pie, both the size of the pie itself and the services sector’s slice of it are larger now than they were 20 or 70 years ago.

“The economy has been growing at 2% on average for the past 70 years, meaning the total value of goods and services has been growing,” Marto said. “Yet, the proportion of output from the services sector has been increasing faster than manufacturing output.”

For instance, in absolute terms, value added by goods-producing industries increased from $2.6 trillion in the first quarter of 2005 to $4.9 trillion in the third quarter of 2025. Value added by service-providing industries also increased, from $8.5 trillion to $22.7 trillion (a much larger amount) over the same period. (The numbers in this paragraph are seasonally adjusted annual rates.)

In relative terms, the goods sector’s share of GDP has declined over the last two decades, while the services sector’s share of GDP has risen. (See the chart below from online economic database FRED.) GDP, which measures the total value of final goods and services the economy produces, is equal to the sum of value added across all industries. In short, the services sector has made up an increasingly larger portion of the overall economy.

Services’ Share of Employment

At the end of 2025, the services sector accounted for 72% of U.S. employment. However, at the beginning of 1950, the services sector employed just 1.3 workers for each nonservice worker. By 2005, this ratio had risen to 4.1 service workers for each nonservice worker. By the end of 2025, it was 5.3. As the next FRED chart shows, the number of employees in service-providing industries has grown faster than employment in goods-producing industries since the beginning of 2005—the tail end of what Marto characterized as a large shift in jobs toward services that has been similar in magnitude to the shift in GDP.

Services’ Share of Household Spending

Another way to look at the services sector’s role in the economy is through the kinds of things people spend their money on. Personal consumption expenditures, or PCE, tracks what people buy, not what companies do. Therefore, services are classified not by industry but by type of product (the blue jeans from the earlier example).

Consumption data might be a fuzzier way to gauge the services sector, but the trend is still evident, Marto said. For example, services represented nearly 70% of PCE in November 2025, up from 65% in January 2005 and 45% at the start of 1950. The FRED chart below shows that Americans spend much more on services than they do on goods.

Measuring the Services Sector

Various ways of measuring the U.S. services sector produce similar, but not identical results. In addition to using industries versus consumption to define services, differences may result from:

• Calculating the services sector’s economic contribution as a share of gross output instead of GDP: Gross output includes the value of resources used in intermediate steps of production that GDP (or value added) doesn’t count in its number for “final” goods and services.
• Including the government’s share of GDP and employment: Public administration is sometimes included with the services sector.

What Explains the Growth of Services’ Role in the Economy?

No matter which metric you choose, the services sector clearly occupies a larger place in the U.S. economy than it did 70 years ago. Economists often explain the sector’s expansion over time in two general ways, Marto said.

The first is that labor and economic output flow to the less productive sector. Productivity in the goods-producing sector has grown at a much faster rate—through automation in manufacturing industries, for example—than productivity in the services sector. As a result, producing goods requires fewer workers, who then move to the services sector. In addition, greater productivity reduces the cost of producing goods and, in turn, their prices for consumers. Together, these mechanisms work to increase the share of services in employment and GDP.

“And that’s exactly what we see in the data. The price of manufacturing goods has been falling over time,” Marto said.

The second is that, as economies become wealthier, demand for services begins to exceed demand for goods. In other words, what people spend on services such as health care, education and entertainment outpaces what they spend on goods. Across the world, countries with higher levels of GDP per capita tend to have a larger share of their economic activity in services, Marto said.

Where Has the Services Sector Grown the Most?

As the services sector expanded, Marto said, disaggregating it in greater detail became important to accommodate industries, firms and jobs that didn’t exist in prior decades—because of new technologies, for example. These new areas tended to be more concentrated in the services sector, he added. Computers becoming more mainstream, for instance, led to a manufacturing industry for producing them. But a host of new service industries related to computers sprang up as well.

While the services sector has been growing at a fairly constant rate, that doesn’t mean all industries within it have expanded equally each year. In the 1960s, the emergence of the shopping mall coincided with growth in retail trade, Marto said. In the 1980s, deregulation of the financial industry and the IT revolution helped services in those areas boom. Over the last two decades, there has been notable expansion in the health care and social assistance industry, along with education. The next several years may see the services sector’s information industry becoming more important with the wider adoption of generative AI, he noted.

“The services sector being big of course has ramifications for the entire economy,” Marto said. “Whatever happens to the services sector will be felt in aggregate economic activity.”