Actually lots of people still sew. If you look around at blogs, you will find several sewing blogs, and they have lots of followers. I have several friends who sew and an aunt who practically has a second income as a seamstress. Oh, and I have many relatives who quilt, so the fabric industry isn't going under just yet!
As for the quality of handmade clothing being better than store-bought, well, I suppose that depends on the maker. If he or she is good at knitting, crocheting, sewing, etc., then, yeah, the quality is probably quite high. Plus, tailor-made clothing is much more expensive than one-size-fits-all clothing, and tailor-made is what you usually get with handmade.