Evans On The Economy -- Building Manufacturing's Future

June 27, 2005
New plant construction has nearly disappeared domestically as U.S. companies expand elsewhere.

Since 1980, U.S. manufacturing employment has declined from 21% of total U.S. employment to 11%. That's 10 percentage points during 25 years. Yet boosters of the future of U.S. manufacturing often claim this statistic is misleading. Their reason: U.S. manufacturing production as a proportion of total inflation-adjusted GDP is just about the same now as it was 25 years ago. And when the data are plotted on a graph that does appear to be the case.

However, a critical question remains: Which statistic provides a more accurate indicator of where the U.S. manufacturing sector is heading?

I suggest that at least some of the answer lies elsewhere -- in the data relating to manufacturing construction. Since 1980, manufacturing construction -- that is the building of new plants and the expansion of existing plants -- has fallen from 10% of total nonresidential construction to 2%. Relative to the index of manufacturing production, it has plunged from 0.8 to less than 0.1.

There have been two major periods of decline in these ratios: 1982 through 1985 and 1998 to the present. The earlier decline can easily be explained by extremely high real interest rates and an overvalued U.S. dollar. Yet during the past seven years, interest rates fluctuated in a range from fairly to remarkably low, and the U.S. dollar has generally been near or below its equilibrium value. Hence, there is no likelihood of a reversal of this declining trend such as the reversal that occurred in the late 1980s and early 1990s once interest rates and the dollar's value returned to normal levels. There is no mystery about what happened to manufacturing construction. It went overseas.

Of course, this creates a vicious circle. The most modern plants, incorporating the most modern technology, are being built in low-wage countries. The plants left in the United States are, for the most part, obsolete. They also employ the most expensive wage earners, in terms of seniority, fringe benefits and forthcoming pension payments.

At the same time that new manufacturing construction has almost disappeared in the U.S., purchases of capital equipment by the manufacturing sector remain fairly robust and, in general, are keeping pace with purchases by other industries. In some cases, new machines are simply being placed in old buildings. But most of the expansion of manufacturing facilities is taking place in those high-tech industries that require relatively little in the way of plant. The good news is that the value-added per employee is very high in these industries. The bad news is that this means very few production workers are required.

These are hardly shocking new statistics. The decline in construction started many years ago. Nonetheless, some people -- including but not limited to union leaders and liberal politicians -- still don't see it coming. In their view, if we could only get other countries to grow faster, or institute "fair" trade measures, or make Asian and Latin American nations stop underpaying their workers, the U.S. trade deficit and the decline in the U.S. manufacturing sector would be reversed. But putting our hopes in dead nostrums will not solve any of these problems. And those who cling to the past for their life rafts will never make it back to the shore.

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.

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