Downsizing: Different Effects on Different Industries

That is the message from a recent Economy.com analysis. With improved U.S. economic output expected to finally translate into hiring as the year comes to a close, it is a good time to take stock of industries that have suffered through major restructuring since the onset of recession. Given the severity of employment reductions, some hard-hit industries cannot claim that their woes are due to demand weakness alone. For the worst off industries, some supply imbalances clearly were present.

Areas with a large local presence of such hard-hit industries have suffered mightily as a result of firm restructuring. For example, manufacturing firms in the tech-heavy San Jose area have shed around one-third of their jobs, which is similar to the amount of job losses that manufacturers in Detroit suffered when the automobile industry downsized in the early 1980s.

Where the new, leaner industries are situated geographically may well shed light on regional economic performance going forward. When an industry faces weak demand and pricing environments, high-cost operations come under pressure. Manufacturing firms with newer facilities and equipment are more likely to be profitable during periods when input costs are high. Also, those that continue to invest in upgrades and R&D have a more stable employment base than firms that focus entirely on fabrication.

The future of U.S. manufacturing will likely consist of such firms that focus on developing new production processes rather than those that replicate existing ones. Given high domestic labor costs and a well educated workforce, U.S. manufacturing’s comparative advantage lies in developing products, not mass producing them.

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