Where the Recovery Won't Reach
The recession of 2001 may have been exceptionally mild for the economy as a whole but it devastated U.S. manufacturing. The number of manufacturing jobs fell from 18.5 million in the middle of 2000 to 16.9 million today--a decline almost as steep as during the harsh downturn of 1981-82.
In the past, manufacturing employment typically rebounded after a recession ended. After the 1981-82 downturn, manufacturing got back about two-thirds of the jobs it had lost. In the 1990s, growth in U.S. high-tech manufacturing helped offset losses in industries such as steel and apparel. By 1998, manufacturing employment had risen to only 11% below its all-time high.
This time, however, the bounceback may not be so strong and the bulk of the manufacturing job losses may be permanent. The sharp decline in U.S. corporate profits, combined with the burden of a strong dollar, is forcing companies to take a fresh look at how they can cut costs. And in an increasingly global economy, they're deciding it's cheaper to use foreign factories than domestic ones.
The result: As U.S. demand rebounds, imports are rising far faster than domestic production. First-quarter imports of goods rose at a 10% annual rate, adjusted for inflation. South Korean factories are ramping up production, while electronics makers in Taiwan are restarting idle machines to turn out chips, phones, and flat-panel displays. Meanwhile, manufacturing output in the U.S. rose at a mere 3% annual rate in the first quarter. What's worse, factory employment shrank at a 6% annual rate, with no sign of a bottom (charts).
The failure to generate manufacturing jobs at home may already be muting the recovery. The worsening of the trade deficit subtracted 1.2 percentage points from economic growth in the first quarter, the Commerce Dept. says.
And the economic drag appears likely to continue, as manufacturers aggressively cut jobs even as demand picks up. The employment index of the Institute for Supply Management survey for April was 46.7, signaling further contraction of the factory workforce. In recent days, DuPont announced plans to cut about 1,400 U.S. textile manufacturing jobs, while Kraft Foods Inc. (KFT ) said it would close a Chicago plant that makes Shake 'N Bake coating mix. Maytag Corp. (MYG ) has transferred four assembly operations to a maquiladora in Reynosa, Mexico, and plans to transfer 12 others by August. In April, San Francisco's Levi Strauss & Co., which once boasted of its American-made clothing, said it would close six U.S. factories and lay off 3,300 workers. That will leave it with just two U.S. factories. Most of its clothing comes from contractors in Latin America and Asia.
Intense competition makes low-cost regions hard to resist. In electronics manufacturing, for instance, the labor cost for assembling printed-circuit boards--the guts of electronics gear--is about $7 to $8 an hour in the U.S., vs. about 50 cents an hour in China, estimates Jeffrey A. Bloch, vice-president for electronics manufacturing services at iSuppli Inc., a supply-chain consulting firm in El Segundo, Calif.
The cost differential wasn't so compelling during the tech boom of the late 1990s when companies like Cisco Systems Inc. (CSCO ) and Lucent Technologies Inc. (LU ) were willing to pay extra for the convenience of having production in the U.S., close to their engineers and customers. "Flexibility was more important to them than cost," says Bloch. With the tech boom over, he says, "those industries have now decided to go to the lower-cost regions."
Moreover, so much of electronics manufacturing has moved to Asia already that it's cheaper and easier to build gear there than to ship all the little pieces across the Pacific for assembly in the U.S., says Jim Sacherman, chief marketing officer for Flextronics International Ltd. (FLEX ), the Singapore-based contract manufacturer. Flextronics says it will soon have 75% to 80% of its production in low-wage regions, vs. half in 2000. Once gone, production rarely shifts back to high-cost regions. Says Sacherman: "It's pretty hard under any market conditions to say, `For these reasons, I'm going to pay more."'
Adding to their attractiveness, countries such as China, Mexico, Malaysia, and South Korea are moving up the manufacturing learning curve, boosting their productivity faster than in the U.S. In the second half of the 1990s, U.S. manufacturing productivity rose at a solid 4.6% rate--but manufacturing productivity in South Korea, for example, improved nearly 12% a year.
While most manufacturing jobs are in production, the category also includes engineers, researchers, managers, and support staff of manufacturing companies. Some white-collar Americans are even moving to where the jobs are. To lure Westerners and U.S.-based Chinese to a new billion-dollar chip fab in Shanghai, China's Semiconductor Manufacturing International Corp. is building an elementary and middle school for their children.
It's not just in technology that jobs are shifting abroad. In North and South Carolina, the heart of the South's once-huge textile and apparel industry, many companies that had been struggling to survive have finally capitulated. Worse for them than the recession was the dollar's strength, which triggered a flood of cheap imports. In the past two years, the dollar is up sharply against the currencies of apparel exporters such as Indonesia and South Korea.
Mainly because of the dollar's impact on import prices, retail apparel prices have fallen 3% over the past year. "The strong dollar is just wiping manufacturing out," says Cass Johnson, an associate vice-president at the American Textile Manufacturers Institute.
Makers of machinery and steel are also suffering from the dollar's rise. The job losses aren't even across industries. Pharmaceuticals employment has increased 5% from a year ago despite the recession. Auto industry employment is benefiting from the construction of assembly plants in the U.S. by the likes of Toyota (TM ), Honda (HMC ), and Mercedes. Netting out Big Three plant closings, productivity gains, and expansions by Japanese, Korean, and German auto makers, "auto employment will hold even" through 2010, predicts Sean McAlinden, economics director at the Center for Automotive Research in Ann Arbor, Mich.
For employers, closing U.S. factories makes all the sense in the world. For employees, it can be a terrible shock. Take General Electric Co. (GE ), a leading advocate of globalizing production. It uses Mexican factories to make everything from medical diagnostic gear to appliances. "They really don't give any real consideration to the impact of their decisions on workers," says Edward Fire, a vice-president of the Communications Workers of America. GE says it has generous retraining and separation programs and continues to have a vibrant U.S. production base.
The ability of U.S. manufacturing to generate jobs at home was one of the more pleasant surprises of the 1990s. The inability to keep them here may be one of the unpleasant surprises of this decade.
By Peter Coy in New York, with bureau reports