The news about Midwestern manufacturing has been so bad for so long that any ray of hope is as welcome as the first robin of spring. That ray of hope appeared recently on the front page of the authoritative Financial Times, which reported that Midwestern manufacturing is recovering from the recession faster than the rest of the economy.
But all Midwesterners know that the first robin doesn't necessarily mean that cold weather is over. Similarly, the signs that Midwestern manufacturers are adding output and jobs is better than the alternative but doesn't necessarily mean that the region's long economic winter is ending.
Let's look at the reports, in the Financial Times and elsewhere, and then try to put them into some context.
Part of the FT's reporting dealt with jobs. Michigan, it said, has created a seasonally adjusted 29,800 new factory jobs over the past year: the state has 4 percent of America's manufacturing jobs but has created 15 percent of the new industrial jobs in that time.
The paper then zeroed in on a number of Midwestern companies -- A123 Systems near Detroit, which makes batteries for electric and hybrid cars; Caterpillar of Peoria, which is expanding in the South but retains Illinois as the center of its American operations; Timken, which still produces steel in Ohio; Lincoln Electric in Ohio, a welding equipment maker which has hired 150 people in the past three months.
An FT chart showed the states that led gains in manufacturing employment of the past year. At the top were Michigan, Wisconsin, Ohio and Indiana, with Illinois and Minnesota not far behind. A number of states are still losing manufacturing jobs, but they're all in the east -- especially New York and New Jersey -- or in the south -- Mississippi, Arkansas and Florida, for instance.
Not long before, the Economist magazine, another British-based publication which keeps an expert eye on the American economy, reported that "for the first time in many years, American manufacturing is doing better than the rest of the economy." American factories are exporting, it said. The sector has recovered two-thirds of the losses it suffered in the recession. Both car makers and heavy equipment manufacturers, which dominate Midwestern industry, are gaining.
Since then, some earnings reports from these companies confirm the good news. General Motors announced first-quarter earnings this week that were triple those of a year ago. Ford's first-quarter earnings were its highest in 13 years. Even Chrysler reported a profit. And Caterpillar's global sales have been surging, thanks to a worldwide demand for construction machinery.
Outside the Midwest, sales of computers and other IT gear have pushed Cisco Systems and Intel to record sales.
So what's not to like?
First, we should all take a deep breath and remember that, just because a patient emerges from intensive care, he may not be ready to run a marathon. After years of bad news, some good news is welcome, but the Midwestern economy has yet to turn the corner into the 21st century.
Manufacturing is important to the Midwest. The region's economy is based on heavy industry. For years, most of its employment was, too. Industrial output remains vital: the Midwest, like the nation, still makes and exports as many manufactured goods as it ever did. But it's nowhere near as important to the overall economy as it once was.
That sounds contradictory, but it isn't. Manufacturing output is as high as it was 50 years ago, but the economy has mushroomed since then. Manufacturing accounted for 53 percent of American gross domestic product in 1965. Now it's less than 9 percent.
In addition, manufacturing, like farming, remains productive without providing anywhere near as many jobs as before. In 1960, a third of all American employees worked in factories. Ten years later, this was down to a quarter all all employees. By 2008, when the recession started, it was less than 9 percent.
The reason, of course, is that manufacturing companies can use automation and technology to turn out more goods with fewer workers. This has been going on since the invention of the loom and other labor-saving devices. It's picked up steam since global communications turned national economies into a global economy. Indeed, globalization has made this downsizing and streamlining necessary, to enable manufacturing companies to compete globally.
Manufacturing output fell 15 percent when the recession hit. Manufacturing employment fell apace. Now both are coming back. But history shows that this employment will never come back fully. Oh sure, it will recover, just as it has after every downturn. But each recovery peaks at a lower level than the one before, and every downturn dips a little farther.
It's death by a thousand cuts, and there's no reason to expect any change this time.
But if companies like Ford, Caterpillar and Cisco are doing so well, they should be hiring big time, right? And so they are. But not here.
The Wall Street Journal reported last month that some of the biggest American corporations -- including Caterpillar, Microsoft, Wal-Mart, Cisco, Intel and others -- are adding jobs overseas while cutting jobs here.
Outsourcing has been rampant, of course, since globalization began in earnest. But until recently, companies and business groups argued that shipping some jobs overseas increased profits to the point that these companies could add even more jobs in the United States, more than offsetting the loss. The Journal story said this no longer is true.
The paper said that these companies, all mighty global corporations who between them employ one-fifth of all American workers, cut their U.S. work forces by 2.9 million people in the last decade, while increasing employment overseas by 2.4 million people. The companies argue that this is only natural, since more and more of their sales and other business is overseas.
Caterpillar says that it's hiring both here and abroad -- but much faster overseas. Between 2005 and 2010, it told the Journal, its American work force crew by 3,400 workers, but its overseas work force grew by 15,900 workers.
Even job gains here sometime merit only restrained joy. A123 Systems, which opened that new Michigan plant mentioned above, did so only after Michigan bribed it with $125 million worth of incentives. The plant expects to employ about 1,000 persons. This works out to $125,000 of taxpayer money per job. The state of Michigan would argue that countries like China also lure in companies with massive incentives, so Midwestern states have to do the same.
This trend is not going to change. Richard Florida, the Canada-based sociologist and guru of the "creative class" movement, argues that we'd be smart to accept the departure of manufacturing jobs, many of which can truly be done anywhere, and focus instead on upgrading service jobs -- home health aides, cooks, sales clerks, barbers, child care specialists and the like -- which provide face-to-face services that cannot be outsourced.
Many of these jobs currently are low-wage, low-benefit chores. Florida, in an op-ed piece in the Financial Times, argued for the professionalization and upgrading of these jobs, just as manufacturing jobs in earlier years provided ever increasing wages and stability.
Supporters of manufacturing will argue that the remaining factory jobs are still good jobs, paying far more than these service jobs ever could. Besides, these workers have skills that justify the higher wages.
Once, this made sense. No longer.
Paul Samuelson, the great American economist, said that if a certain good can be made here by a worker earning $30 an hour, and can be made just as well somewhere else by a worker earning $10 an hour, this discrepancy will balance out over time. Sooner or later, he said, the overseas worker's hourly wage will go up to $20, and the American worker's wage has to come down to $20.
This is happening now. Not so long ago, Midwestern jobs flowed to the American South because wages were so much lower there. Now, according to the Financial Times, some of those jobs are staying in the Midwest because Midwestern workers have become cheaper. It said a general-purpose production worker in Michigan now earns an average of $25,240 per year, only marginally more than the $23,090 that the same job brings in Mississippi.
In other words, the Midwest industrial labor force is now down to Mississippi standards, on it's way to Mexican levels.
These are some of the chilly facts behind the balmy headlines about a recovery of Midwestern manufacturing. A round of toasts, in champagne or Bud Lite, is not yet in order.
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