July 14, 2003, 11:36AM
Recession is turning industry upside down Once nation's staple, manufacturers ailing By DAVID IVANOVICH Copyright 2003 Houston Chronicle Washington Bureau
INFORMATION � U.S. manufacturers have lost 2.6 million jobs since July 2000. � In Texas, 100,000 manufacturing jobs have been eliminated since July 2000. � In 1953, manufacturing accounted for nearly 33 percent of U.S. jobs. Today, that percentage is 11.3.
WASHINGTON -- The Ohio Art Co. moved production of its trademark Etch A Sketch from the Buckeye State to China. The toy maker couldn't pass along any price increases and had to cut costs somehow.
Meanwhile, Morgen Manufacturing Co., a South Dakota concrete-pump maker, was so clobbered by a strong U.S. dollar it finally closed up shop, and Dow Chemical, dismayed by high U.S. natural gas prices, decided Germany was a cheaper place to do business than Louisiana.
American manufacturers have been shedding jobs for nearly three years and counting. And while other segments of the economy have been rebounding, manufacturers remain desperate for a turnaround.
"I think we're at bottom," Peter Huntsman, chief executive officer of Huntsman Inc., the world's largest privately held chemical maker and a major player in Houston's petrochemical industry, predicted hopefully.
But he added: "I've said we're at bottom for the last four years, and each year just seems to be getting worse."
U.S. manufacturers have lost 2.6 million jobs since July 2000, including 56,000 just last month, according to the National Association of Manufacturers. Nearly 100,000 of those pink slips have been handed out in Texas.
Federal Reserve Chairman Alan Greenspan is sure to hear concerns from lawmakers about the plight of manufacturing when he travels to Capitol Hill this week to discuss the state of the economy.
Manufacturers have been plagued with a host of troubles, from deflationary pressures to asbestos liability, from soaring health care costs to gyrating energy prices.
And they are complaining with increasing bitterness about the emerging economic power of China. But the chief culprit of their woes may be American businesses' own refusal to spend cash.
Historically, America's factories have led the nation out of its economic blues. Today, manufacturing is posting its weakest recovery since 1919.
Of course, these are not normal times.
The nation was still suffering from the dot-com bust hangover when terrorists slammed into the World Trade Center. The scandals at Enron Corp., WorldCom and Global Crossing spooked investors -- "If you can't even trust the phone company, who can you trust?" laughed Kathryn Kobe, chief economist for Washington's Joel Popkin and Company. And the U.S.- led invasions of Afghanistan and Iraq, together with the government's repeated Code Orange alerts, put the world's nerves on edge.
But consumer spending has remained strong, as real incomes continue to rise despite growing unemployment. The housing market -- buoyed by ridiculously low interest rates -- has remained red hot, while the Dow Jones industrial average is up 27 percent from the lows of October 2002.
But business leaders are reluctant to spend the money on capital equipment -- computers, machinery and the like -- that would give manufacturers a much-needed boost.
While the National Bureau of Economic Research has not declared the recession officially over, many economists believe the economy began growing again back in December 2001.
Since that time, factory output has inched up less than 1 percent. In contrast, after the recessions of the 1960s, '70s and '80s, manufacturing production jumped an average 23 percent after 17 months of recovery, according to a study conducted by Joel Popkin. Even in the slow recovery that followed the recession of 1990-1991, production grew 7 percent.
As a percentage of the nation's work force, manufacturing has been on a decline for half a century, as the United States transitions from an industrial power to more of a service economy. In 1953, manufacturing accounted for nearly one in every three jobs, noted Bryan Jordan, an economist for Banc One Investment Advisors in Columbus, Ohio. Today, manufacturing comprises about 11.3 percent of the nation's jobs, down from about 13 percent just three years ago.
Manufacturing plays a critical role in the economy, accounting for much of the research and development and providing virtually the only means of upward mobility for workers lacking a college degree.
With the world's economies becoming more integrated, companies are facing fierce competition from abroad. That means U.S. firms can't pass any increased costs along to their customers.
Bryan, Ohio-based Ohio Art has been doing business in northwestern Ohio for 92 years. But retailers wouldn't let the company kick up its prices to accommodate higher operating costs, so the firm had to move operations to the world's new toyland, China.
China has become a particular target of U.S. manufacturers. The United States' trade deficit with China topped $100 billion last year. As Archie Dunham, chairman of the Houston-based oil company ConocoPhillips and chairman of the National Association of Manufacturers, told Houston business leaders last month: "This is the first time the world has seen an imbalance of that size between two trading partners."
In part, the trade imbalance is the result of Americans' insatiable desire for computers, electronics, toys and other consumer goods. Bloomberg News recently estimated that if the giant retailer Wal-Mart were a country, it would represent China's eighth-largest trading partner.
The Chinese won't allow their currency, the yuan, to float against the dollar. U.S. manufacturers complain that means Chinese products are priced artificially low.
The strong U.S. dollar has been a major problem for American manufacturers for some time, since the high value of the dollar makes their products more expensive overseas. Over the last year, the value of the dollar has dropped about 11 percent against foreign currencies, Banc One's Jordan noted.
That was too late for Morgen Manufacturing. The firm had already been hurt by the attack on the World Trade Center, which caused construction firms to postpone many commercial projects, thus dampening demand for concrete pumps. The company shut down last October after 50 years in business.
Chemical companies have been hit by the recent run-up in natural gas prices in the United States, a problem analysts warn could continue for years.
With gas prices in the United States at twice the levels seen in other parts of the world, Dow Chemical has relocated production of the petrochemical chlor- alkali, used in compact discs, from a plant in Plaquemine, La., near Baton Rouge, to Germany.
The high cost of natural gas, coming on top of such a slow economic recovery, has executives like Huntsman still pessimistic.
The U.S. economy, he believes, remains "stubbornly soft." He doesn't expect his firm to begin plunking down cash for big-ticket projects for at least a year or so.
ConocoPhillips' Dunham is more upbeat. He points to work orders for U.S. factories, which were up slightly in May, after a sharp drop-off in April.
The economic numbers may send some mixed signals, but "that's what you get when coming out of the tunnel," Dunham said. --
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