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The four sectors of the U.S. economy: The full breakdown

At a glance:

  • How do industries and sectors differ?

  • The manufacturing sector

  • The services sector

  • The wholesale sector

  • The retail sector

  • Summary of economic industries and sectors

It’s good to know the different sectors of the economy because they operate in different ways. Knowing how they earn profits and how they spend money on their own operations will help you choose among businesses or sectors to invest in.

Some investment funds, for example, concentrate their holdings in one or more industries in order to meet their investment objectives.

American flags fly in front of General Motors headquarters in downtown Detroit, Michigan, in 2005. (Photo: REUTERS/Rebecca Cook RC/KS)
American flags fly in front of General Motors headquarters in downtown Detroit, Michigan, in 2005. (Photo: REUTERS/Rebecca Cook RC/KS)

How do industries and sectors differ?

In the U.S. economy, each industry and industry sector has characteristics that make it unique and different from other industries.

Industries are categorized by primary type of business activity, such as healthcare. A sector is a smaller industry segment whose industries share certain characteristics.

For example, medical suppliers are a sector of the healthcare industry.

How it works, basically

Because the economy is segmented, different sectors grow at different rates and times than others.

For example, industries have different levels of profitability. Whereas one industry may be profitable at XXX dollars, another one may need to make more or less to be considered profitable.

Industries also differ in the way in which they are structured financially, including the way finances flow through each particular industry.

For example, each industry may spend its capital differently. Regulated industries will have different financing requirements than non-regulated industries, and so on.

Sectors: private and public

Industry sectors can be classified as falling under either the private or public sector.

The part of the economy in which goods and services are produced and/or distributed by the government is called the public sector.

The part of the economy in which goods and services are produced and distributed by non-government individuals and organizations is called the private sector.

How the public sector works

The public sector is made up of local, state, and federal governments.

The goal of the public sector is to provide resources to the public that might not otherwise be produced by the rest of the economy. It provides goods and services in the name of public interest.

For example, Departments of Public Instruction or Housing are part of the public sector. Government purchases are used to operate the government and to provide public goods (such as education, national defense, etc.). These purchases are financed by taxes and borrowing in the form of debt securities, such as bonds.

How the private sector works

Investment funding in the private sector, on the other hand, comes from both debt and equity securities.

The private sector includes both households and businesses.

The function of the private sector is to make profits by producing goods and services that satisfy the unlimited wants and needs of the consuming public. Retail companies and restaurants are examples of the private sector.

Sectors also differ regarding production and marketing

Another important distinction is that between marketed and non-marketed production.

Products and services produced by non-marketed production are distributed to consumers, usually by governments and non-profits (in the private sector). Invested capital of non-marketed production is raised from contributions, taxes, and investment money.

Products and services stemming from marketed production are sold, usually through the private sector. Invested capital from marketed production comes from the sales of these services and investment earnings.

Riverside industrial pulp mill showing smokestacks and stream releases as the facility operates on a sunny afternoon. (Photo by: Education Images/Universal Images Group via Getty Images)
Riverside industrial pulp mill showing smokestacks and stream releases as the facility operates on a sunny afternoon. (Photo by: Education Images/Universal Images Group via Getty Images)

The manufacturing sector

Before a product can be sold on the marketplace, it must be created.

The manufacturing sector involves the creation of something (making or assembling machines, cars, etc.) or the shaping/forming of something out of an object (steel rails, nails, etc.).

It is the mechanical, physical, or chemical transformation of materials or substances into new products. Manufacturers profit by selling their newly created goods to wholesalers, retailers, or directly to customers.

Manufacturers must invest

Of course, to make something, you need the materials to make it.

The manufacturing sector must invest in the proper equipment (such as assembly line machines), property (such as factories or mills), labor, materials, production, marketing, advertising, and research and development.

Some manufacturing companies, such as custom tailors and even bakeries, create new products by hand.

Examples of manufacturing industries

The most well-known types of manufacturing industries include the following:

  • Automobiles

  • Paper

  • Clothing

  • Toys

  • Textiles

  • Plastics

Karen Hockaday styles Karyn Richardson's hair at the Polished Nail Spa & Salon on February 4, 2016, in Parker, Colorado. (Photo: Anya Semenoff/The Denver Post via Getty Images)
Karen Hockaday styles Karyn Richardson's hair at the Polished Nail Spa & Salon on February 4, 2016, in Parker, Colorado. (Photo: Anya Semenoff/The Denver Post via Getty Images)

The services sector

The services sector contains companies that primarily provide services to individuals, businesses, and governments. A service is any activity that satisfies a consumer want or need without the production of a tangible good.

How it works

Service industry companies must invest in property, distribution and communication equipment, advertising and marketing, labor, and research and development. Companies in the service industry profit by selling their services directly to consumers.

Examples

The most common types of industries in this sector include:

  • Financial

  • Food service

  • Health care

  • Legal

  • Real estate

  • Travel

  • Utilities

  • Entertainment

The wholesale sector

Companies that sell goods that will later be resold by other companies or institutions are called wholesalers.

Companies in the wholesale sector sell their products mainly to retailers or other wholesalers rather than directly to consumers. They may act as buyers or sellers for other companies or sell their products to other professional users, such as commercial businesses or farms.

How they work

Wholesale companies must invest in property (warehouses, land, etc.), transportation, office equipment, and labor.

They must closely monitor their inventory levels because of the low profit margins associated with wholesaling. Wholesalers make a profit by buying products, marking them up, and then reselling them to retailers.

Wholesalers sometimes close a sale before they are able to provide their goods. Instead of putting up collateral to back up their end of the deal, they use unsecured trade credits. The chance that a wholesaler might not be able to meet its end of a sale causes investor risk.

Examples

Wholesalers are categorized by the types of goods they resell to retailers. Typical products resold by wholesalers include the following:

  • Automobile equipment

  • Lumber

  • Commercial equipment

  • Machinery

  • Metals

  • Hardware

The retail sector

Companies in the retail sector sell merchandise and related services to the public for personal or household consumption. The retail sector invests in property (stores, land, etc.), goods to be sold, advertising, and labor.

How they make money

Retail companies profit by marking up the goods they buy from wholesalers. They make their sales directly to public consumers.

Examples of retail

Industries in the retail sector consist of retail stores. The most familiar types of retail stores include the following:

  • Supermarkets

  • Bookstores

  • Music stores

  • Convenience stores

  • Shopping malls

  • Department stores

Summary of economic industries and sectors

Knowing how industry sectors profit and spend their money can help you make better investment decisions. With an understanding of how different industries work, you can compare the relative successes and failures of your investments to those of other companies within and across different sectors.

The manufacturing sector creates new products and sells them to wholesalers. Wholesalers resell them to retailers. Retailers then sell the products to consumers. Services that do not involve tangible goods are also sold to consumers through the services industry.

Keeping track of these distinctions should help you sort through your many investment choices.

This content was created in partnership with the Financial Fitness Group, a leading e-learning provider of FINRA compliant financial wellness solutions that help improve financial literacy.

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