The woes of Japan over the past decade are partially due to the collapse of its stock market and overvalued land prices, but that's not the whole story. More importantly, the overvalued yen caused manufacturing facilities to move overseas. The economy became hollowed out, and when the yen returned to equilibrium, it was too late to entice firms to return. To a certain extent, that also happened in Western Europe. Will the same thing happen here? The proportion of jobs in manufacturing has fallen for the past 50 years, which is to be expected as the U.S. economy matures and services become relatively more prevalent. However, in the past, while the ratio of manufacturing to total employment fell sharply during recessions, it always rose during booms. That didn't happen during the 1990s. The ratio of manufacturing to total employment fell 4% during the last full boom year of 1999. There is a big difference between the loss of manufacturing jobs because an economy matures and a loss in jobs because more plants are moving overseas, which is what has happened to the U.S. economy during the past 20 years. In the 1990s, employment growth in most sectors was quite robust -- with labor shortages developing in major areas -- even with the accelerating loss in manufacturing jobs. The employment boom of that decade occurred primarily in construction, business services and other services -- most of which are related to the business sector (engineers, lawyers, professional organizations). Yet during the recession, only health care and government employment held up. An economy that is built exclusively on growth in government and health care services is not going anywhere. During the recent recession, corporate profits fell $173 billion. Of this amount, $113 billion was in manufacturing, $40 billion was in transportation and utilities, and $40 billion was in business services; other industries posted about a $20 billion gain. The transportation industry will presumably recover from the shock of Sept. 11. Profits in the service sector also are likely to pick up during the recovery, albeit with some lag. However, it is not at all clear whether the manufacturing sector can recover. In the overall economy, the ratio of total pretax profits to GDP has dropped from a peak of 14% in 1951 to 6% in 2001. Nonmanufacturing profits have remained relatively constant at 6% of GDP during the same period, while the ratio of manufacturing profits to GDP has dropped from a peak of 8% to 0.5%. That doesn't leave much room to go. On this basis, the rate of return on capital stock is only about 2%, and the rate of return on equity is only about 4%. It doesn't take a complicated econometric analysis to see where this trend is heading. If manufacturing profits continue to decline, they will soon be negative. Firms will either shut down entirely or -- more likely -- accelerate their move to foreign locations. Eventually the U.S. will be a hollowed-out economy. The sharp decline in the manufacturing profit ratio occurred during the latter half of the 1990s, when the stock market was surging, contributions to pension plans were far less than usual, health-care costs were temporarily contained, interest rates were steady or falling, and world economies were booming. What happens to profits when the stock market stagnates, the rise in health-care costs returns to the double-digit range, interest rates increase, and the U.S. and world economies remain sluggish? On balance, that does not seem to be the recipe for higher manufacturing profits, robust employment or above-average growth. Unless present trends are reversed, more jobs will head overseas. The relentless pressure on costs and the accompanying rapid growth in productivity is a two-edged sword in the sense that employment doesn't rise very fast. It all adds up to sluggish growth for several years. 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.