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Weak Dollar Little Help for Manufacturing

Despite the decline in the dollar, U.S. manufacturers are likely to see a decline in their domestic employment over the next year

You would think that manufacturing employment would be recovering nicely these days. The cheap dollar ought to be stimulating the sales of big exporters like Boeing (BA), Caterpillar (CAT), and DuPont (DD). After all, the dollar's recent declines make American manufactured goods cheaper overseas, and they raise the cost of manufactured imports, encouraging Americans to buy domestically made alternatives.

But the reality isn't as pretty as the textbook picture. In an interview this week, the National Association of Manufacturers' chief economist, David Huether, predicted that the manufacturing sector is going to do worse than it has the past few years in spite of the dollar's fall. Manufacturing employment is just over 14 million. Says Huether: "Probably over the next year, it's going to fall by more than 100,000."

So even though the trade deficit is slowly shrinking, manufacturing is still under pressure. Why are factory jobs disappearing even with American goods on permanent sale worldwide? Here are some of the key reasons:

Big U.S. manufacturers tend to spread their production around the globe, both to be closer to their customers and to avoid having all their eggs in one currency basket. Caterpillar, for example, makes its popular hydraulic excavators not only in Aurora, Ill., but in Brazil, Europe, Japan, and China as well. Company employment is split roughly in half between the U.S. and other countries, and Cat doesn't shift production because of currency moves. Boeing gets a bit more of a kick from the dollar because the vast majority of its production is in the U.S. The dollar's fall "advantages us a little" vs. Europe's Airbus, says spokeswoman Anne Eisele.

While the export situation has improved, it isn't enough to make up for slumping domestic demand. Home building is in the tank, cutting demand for manufactured goods ranging from lumber and concrete blocks to home furnishings. Consumer spending on the whole is softening, and business investment isn't strong, either. While foreign trade matters, it's still a small factor vs. domestic consumption.

Although the dollar has fallen a lot against the euro and the Canadian dollar, to name two currencies, the governments of Japan and China are preventing the dollar from falling against the yen and the yuan. That's making it hard for the U.S. to increase exports to those countries, or compete with imports from them.

Productivity is improving more rapidly in many of America's trading partners. Even taking into account the dollar's fall, the U.S. lost ground last year in manufacturing unit labor costs vs. Japan, Germany, Taiwan, and Sweden, among other countries, according to a Sept. 27 report from the Bureau of Labor Statistics. Unit costs in dollar terms rose 0.1% last year in the U.S. while falling 7% in Japan. China isn't included in the report, but it has seen surging productivity.

The U.S. manufacturing base has shrunk so much that the U.S. simply lacks the capacity to export its way out of its trade deficit. Toys, for example, are scarcely made in the U.S. anymore. The same goes for most consumer electronics. It would take years of building factories and hiring and training factory workers to rebuild that manufacturing base.

The U.S. is in the middle of a long-term transition from manufacturing to services. Employment in the sector briefly flattened in 2006 as manufacturing boomed worldwide, but now the underlying trend seems to be reasserting itself. Total employment in the manufacturing sector, including white-collar jobs, is just a tad over 14 million, down from over 17 million at the start of the 2001 recession.

The biggest winners from the falling dollar are smaller U.S. manufacturers that do most of their production and purchasing in the U.S., and sell into markets like Europe where the dollar has had its biggest decline. Clabber Girl in Terre Haute, Ind., a 157-year-old, family-owned business that makes baking powder, is "getting a lot more interested now in European Union countries," says Eric Gloe, vice-president for sales and marketing. Sales are also good in Saudi Arabia—its biggest customer. Likewise Recreatives Industries of Buffalo, N.Y., where exports as a share of sales have risen from about 12% to about 35% in the past several years. Says Marketing Director Galen Reich: "If not a deal closer, the dollar is at least a deal helper. All of a sudden out of the blue I'm hearing from my Danish dealer."

As those examples go to show, the dollar's fall is a plus for U.S. manufacturing. But it's no match for all the other forces arrayed against the sector.

Coy is BusinessWeek's Economics Editor .

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