Evans On The Economy -- The Bleak Future Of U.S. Manufacturing

During the past three years, U.S. manufacturing employment has declined by 2.1 million, some 700,000 jobs per year. Some may blame the recession. But it's not the main reason. Jobs have been transferred to other countries, places where labor costs are much cheaper, and government restrictions less onerous. Few, if any, of these jobs will return when the U.S. economy recovers. Rather, U.S. manufacturing employment, currently about 16.2 million, will continue to decline for the rest of this decade, falling to about 12 million by 2010. Most of the manufacturing jobs will reappear in Latin America, China and India. The U.S. also will see a net loss of 4 million service jobs, as more services work moves overseas. What will people in the U.S. do? Basically, the same thing they have been doing over the past three years: find other jobs in the service sector that do not pay as well. But if high-paying jobs disappear, who will be able to buy all the goods and services that America now produces? One thing we know almost for certain is that real wages will continue to shrink, and paychecks will buy less. Workers will become poorer. And that would seem to point to a much slower growth rate and steadily rising unemployment in the U.S., similar to what has occurred in Germany and Japan. But the situation is more complicated. Two other factors need to be considered. First, as more firms move overseas, and their labor costs decline, profit margins will recover from their recent record lows. That will boost stock prices and, assuming the tax rate on dividends remains reduced or is eliminated, also raise dividend payments. In other words, total income may not grow at a slower rate, but it will be redistributed from labor to capital. Second, imports will continue to rise rapidly as a proportion of total U.S. GDP. Because costs are so much lower in many other areas of the world, import prices will fall, and U.S. inflation will remain low. As a result, U.S. interest rates also will remain low for many years. Home prices will continue to rise, and homeowners will continue to cash out their increased equity. Lending institutions will be glad to cooperate because the economy will remain awash in liquidity. Thus workers who own their own homes will be able to offset their shrinking paychecks by cashing in on the rising value of their property. Because of the continuing emphasis on cost-cutting and the shift of more jobs to overseas locations, U.S. productivity growth will remain rapid, near 3% per year. That also is the expected growth rate in overall GDP, which implies no gain at all in total employee-hours. But I do not see a rising unemployment rate; instead, the number of hours will decline as more jobs switch from manufacturing, where the work week still averages 41 hours, to services, where it averages 32 hours. Also, many of the self-employed will work relatively few hours. Thus U.S. unemployment is likely to remain near its current level of 6% for several years, something that also keeps downward pressure on wage rates. In the very long run, however, wage rates will rise around the world and the drain of jobs will come to a halt. Yet with over 2 billion people to absorb in India and China, that won't occur for many decades. In the meantime, manufacturing will continue to be a decreasing proportion of the U.S. economy. Michael K. Evans is chief economist for American Economics Group, Washington, D.C., and president of the Evans Group, an economics consulting firm in Boca Raton, Fla.