The economic development of Illinois falls into four periods: the frontier economy, up to 1860; the industrial transition, 1860–1900; industrial maturity, 1900–1950; and the transition to a service economy, 1950 to the present.
In the first phase, subsistence agriculture was dominant; the cost of transportation was high, cities were small and few, and cash markets for farm products hardly existed. The main activity was settling and clearing the land. A rudimentary market economy developed at the end of the period, with real estate and land speculation the most lucrative activities.
The industrial transition began about 1860, stimulated by the construction of the railroad network, which opened up distant markets for farm products and rural markets for manufactured items. The Civil War stimulated the rapid growth of cash farming, commercial and financial institutions, and the first important factories. The last quarter of the 19th century saw the closing of the agricultural frontier in Illinois and the rapid growth of commercial towns and industrial cities, especially Chicago.
Industrial maturity was reached in the early 20th century. Large factories grew, and small ones proliferated. Chicago's steel industry, actually centered in Gary, Indiana, became 2nd in size only to Pittsburgh's, while the state took a commanding lead in food production, agricultural implement manufacture, and agricultural finance. The depression of the 1930s stifled growth in the state and severely damaged the coal industry, but with the heavy industrial and food demands created by World War II, the state recovered its economic health.
Since 1950, the importance of manufacturing has declined, but a very strong shift into services—government, medicine, education, law, finance, and business—has underpinned the state's economic vigor.
Severe competition from Japan wreaked havoc in the state's steel, television, and automotive industries during the 1980s, while Illinois's high-wage, high-cost business climate encouraged the migration of factories to the southern states. Meat-packing, once the most famous industry in Illinois, dwindled after the closing of the Chicago stockyards in 1972. Chicago remained the nation's chief merchandising center during the early 1980s, and an influx of huge international banks boosted the city's financial strength.
In the 1990s Illinois's major industries included primary and secondary metals; industrial and farm equipment; electric equipment and appliances; electronic components; food processing; and printing equipment. Output from the state's manufacturing sector continued to grow in absolute terms until 1999, after which a small 0.5% contraction in 2000 (more than compensated for by annual overall growth rates averaging over 5.2% 1998 to 2000), was followed by sharp 5% contraction in the national recession of 2001. As a percent of total output, manufacturing fell from 17.8% in 1997 to 14.4% in 2001. By contrast, financial services increased 31.5%, and general services, almost 28%, over this time period. In the period 2001 and 2002, Illinois's diverse economy closely mirrored national trends. The biggest job losses were in manufacturing, totaling approximately 64,000 in the two-year period, compared to 35,700 job lost in general services, 24,700 in trade and 12,700 in transportation and utilities. The annual decline in jobs had moderated to 1.3% by September 2002 (from 1.6% in December 2001).
Illinois's gross state product in 2001 was 5th largest among the states at $475.5 billion, to which general services contributed $108.1 billion; financial services, $105.1 billion, trade, $76.2 billion; manufacturing,$68.3 billion; government, $48.5billion, transportation and public utilities, $40.4 billion, and construction, $23.6 billion. The public sector constituted 10.2% of gross state product, below the state average of 12%