Drop in parts, low-priced guns, and the internet are all contributing heavily. Not many people are going to drop $200+ for serious work to a gun that only cost $500 or less to start with. Prices are down because parts are drop-in, not hand fit, for the most part, and replacing/fitting parts is a good chunk of a gunsmith's work.
The internet provides detailed technical information on most any firearm or gunsmithing technique you could imagine. It's allowed a lot of people, myself included, to learn how to work on our own guns. After a few overly expensive and botched jobs by "gunsmiths" I started learning myself, and am now doing bluing jobs and keeping my colts in good working order, fitting 1911 parts and rebarelling rifles. I'd be a good alternative to the local smiths if I spent more time with woodworking.
BUT, I don't see much profit in trying to hang a living on it. I enjoy it, and I'll continue to work on my own guns, but between the insurance costs, the tax and fees for ITAR and ffls, not to mention the overhead of the brick and mortar building, the tooling, and the specialized tools and bits and reamers for every conceivable gun that has to be laying around, you really do need steady, high-dollar work to make any money at it.