Cotton dominated Alabama's economy from the mid-19th century to the 1870s, when large-scale industrialization began. The coal, iron, and steel industries were the first to develop, followed by other resource industries such as textiles, clothing, paper, and wood products. Although Alabama's prosperity has increased, particularly in recent decades, the state still lags in wage rates and per capita income. One factor that has hindered the growth of the state's economy is declining investment in resource industries owned by large corporations outside the state. Between 1974 and 1983, manufacturing grew at little more than half the rate of all state goods and services. Industries such as primary metals, once the backbone of Alabama's economy, were clearly losing importance. The 1980–82 recession hit the state economy harder than the nation as a whole: 39,000 jobs were lost in manufacturing alone, and real output in manufacturing fell by 10.5%. Recovery began in mid-1980s, and in the economic expansion during the 1990s. Alabama job growth averaged close to 2% a year. However, at the end of the decade, Alabama entered recession earlier than most of the nation. State payrolls began to decline in mid-2000, over six months before the national recession in the first quarter of 2001. The annual growth in the gross state product, at about 5% in 1998 and 1999, fell to 3.6% in 2000, and then to 1.8% in 2001. In 2002, the state economy had still not recovered, as layoffs replaced job creation at a record annual pace of more than 1%. Manufacturing job losses were most severe in non-metropolitan counties, and in the textile and apparel industries which is concentrated in Florence and counties to the south. By contrast, the transportation industry continued to grow, with a new Hyundai plant to opening in Montgomery.

In 2001, Alabama's gross state product was $121.5 billion, 16% from the public sector. The main contributions were from general services ($22 billion, up 26% from 1997), manufacturing ($21.6 billion, down 0.6% from 1997), wholesale and retail trade ($20.4 billion, up 17%); government ($19.3 billion, up 17.5%); financial services, including insurance and real estate ($18 billion, up 22%), and transportation and public utilities ($10.3 billion, up 13.7% from 1997. In the first quarter 2002, personal bankruptcies continued to rise, as they had throughout 2001, correlated with a rise in the foreclosure rate from less than 1.5% to almost 2.4%.