U.S. Factories Should Be Humming Next Year...

Although auto production may well provide some bounce in the fourth quarter, the manufacturing sector remains in the doldrums, having shed some 245,000 jobs since February. But economist Joseph Carson of Dean Witter Reynolds Inc. is unperturbed. Once the global economy turns up some time next year, he predicts, U.S. manufacturing will be sitting in the catbird seat.

Sparking Carson's optimism is a wave of announcements by foreign multinationals of plans to set up or expand plants in the U.S. Coming on top of a hefty pickup in overall capital spending, these plans signal growing confidence in the future of American industry.

By their own count--admittedly "far from exhaustive"--Dean Witter econo-mists have totaled up some 40 expansion announcements by foreign manufacturers so far this year, half involving "green field" plants. Led by Japanese auto companies, the list also includes Europeans, Canadians, Indians, and Taiwanese, among others--and industries ranging from steel and chemicals to communications equipment and computers.

Behind this trend is a dramatic rise in U.S. competitiveness. As a result of the dollar's plunge since 1985, and also of wage restraint and faster productivity growth, U.S. unit labor costs have declined sharply against those of other major industrial nations (chart). "America's competitive edge," says Carson, "is now so large that many foreign companies feel they have to produce goods in the U.S. to assure continued access to North American markets."

All of this spells big benefits for the U.S. economy. Carson estimates that the rise of 500,000 to 750,000 units in transplant motor-vehicle capacity--either already announced or being considered by Toyota, Honda, Mercedes-Benz, BMW, Audi, and Mazda--could add $20 billion to $30 billion to U.S. output over the next three years, both directly and via multiplier effects. And that doesn't count the impact of foreign investment in other U.S. manufacturing industries.

Partly because of this trend and an anticipated improvement in the U.S. trade position, Carson thinks the economy's growth rate will approach 4% in the next two years. The ultimate result of America's newfound competitiveness, he says, is likely to be a more durable expansion than observers now expect and a welcome reversal of the long-term decline in manufacturing employment.