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Part III
Presented Papers: View from Three Manufacturing Sectors



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New Directions in Manufacturing: Report of a Workshop Part III Presented Papers: View from Three Manufacturing Sectors

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New Directions in Manufacturing: Report of a Workshop 7 Trends in Rural Manufacturing Chad Wilkerson Federal Reserve Bank of Kansas City The recent economic recession has hit the U.S. manufacturing sector particularly hard. Nearly all types of factories—high-tech and low-tech, durable-goods-producing and nondurable-goods-producing—have been affected in some way. But the slump has hurt the rural areas1 of the United States especially, because manufacturing remains more prevalent in rural areas than in metropolitan areas. This paper examines the importance of factory activity to rural areas across the country and examines how rural factories have performed relative to their urban counterparts in recent years. The paper also discusses the short-term outlook for rural manufacturing, as well as ongoing challenges posed by increased global competition and rapidly emerging technologies in production.2 MANUFACTURING IN RURAL AREAS Prior to the national recession of the early 1980s, the manufacturing sector accounted for approximately 20 percent of employment and 25 percent of personal earnings in both urban and rural areas of the United States.3 Since then, as the U.S. economy has become more service-oriented and reliant on imports for many of its manufactured goods, the manufacturing sector’s share of economic activity in metropolitan areas has declined by nearly half. By contrast, manufacturing’s share of earnings and employment in rural areas has, at least until very recently, hardly fallen at all. Economic studies have documented several causes for the relatively steady presence of rural manufacturing.4 For one, rural areas have generally been more attractive to manufacturing firms because wages, property taxes, and land costs are all lower than in most metropolitan areas. Looking just at wages, rural factory workers earned only about two-thirds as much on average as urban manufacturing employees in 1999. However, the average earnings for a rural manufacturing job outpaced the average earnings for all other rural jobs by about 50 percent. These comparatively high wages, along with the prestige of having a sizable plant in a small town, continue to make manufacturing desirable to many local economic developers. A shift in some kinds of manufacturing from urban to rural areas beginning in the 1980s also helped maintain the importance of manufacturing to rural America. Import competition, particularly from Asia, became intense for many American manufacturers in the 1980s, forcing them to look for cheaper methods of production. One way to cut costs was to move some operations from cities to towns, where labor costs were cheaper. This trend helped make up for the loss of firms in some traditionally rural industries, such as textiles and leather, which moved 1   Rural areas are defined here as areas not included in metropolitan statistical areas (MSAs). 2   C. Wilkerson. 2001. Trends in rural manufacturing, The Main Street Economist. Available at http://www.kc.frb.org/RuralCenter/mainstreet/MSE_1201.pdf. Accessed November 2003. 3   Bureau of Economic Analysis, Regional Economic Information System. Available at www.bea.doc.gov/bea/regional/data.htm. Accessed November 2003. 4   For example, D. Roth. 2000. Thinking about rural manufacturing: A brief history. Rural America 15(1):12-19.

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New Directions in Manufacturing: Report of a Workshop FIGURE 7-1 Local and regional economic dependence on manufacturing, 2000. SOURCE: Bureau of Economic Analysis, Regional Economic Information System. Available at www.bea.doc.gov/bea/regional/data.htm. Accessed November 2003. to lower cost foreign countries due to similar pressures of international competition. Finally, rural areas did not experience the same boom in some types of service activity—such as for business, legal, and telecommunications services—that metropolitan areas enjoyed during the 1980s and 1990s. Thus, manufacturing remains relatively more important in rural areas than in cities. It should be noted, however, that the rapid growth of business, legal, and telecommunications services in cities was due in part to the outsourcing of many of these services by manufacturers, both urban and rural. Thus, the actual decline in manufacturing’s importance to metropolitan areas may be overstated somewhat by data on the manufacturing sector alone. Manufacturing has remained important to more than just a few of America’s rural areas. In fact, according to the most recent data available, more rural counties depend on manufacturing than on any other sector of the economy. Nevertheless, the importance of rural manufacturing ranges widely from region to region. And recent changes in manufacturing’s importance have differed across the country. Like urban manufacturing, most rural manufacturing continues to concentrate in the eastern half of the United States. Among the nation’s eight economic regions as defined by the Bureau of Economic Analysis (BEA), manufacturing’s share of rural economic activity is highest in the Great Lakes region (Figure 7-1). Rural factories in this traditional manufacturing stronghold still accounted for 20 percent of jobs and 30 percent of personal earnings in 2000—percentages that are very similar to those of 20 years ago. Moreover, manufacturing’s presence in the region strengthened during the 1990s, allowing steady job growth to continue. Rural factory employment in the 1990s also rose considerably in the Plains and Rocky Mountains regions. However, many of the new plants in the Plains states are in the relatively low-paying food processing industry, and manufacturing in the Rocky Mountain states remains a very small part of the economy.

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New Directions in Manufacturing: Report of a Workshop FIGURE 7-2 Decline in U.S. manufacturing employment in rural and metropolitan areas between September 2000 and December 2002. SOURCE: Bureau of Economic Analysis, Regional Economic Information System. Available at www.bea.doc.gov/bea/regional/data.htm. Accessed November 2003. In contrast to the interior regions of the country, rural factory jobs in the nation’s coastal regions declined in the 1990s. New England continued to lose a large number of jobs at rural plants producing nondurable goods, such as textiles. Rural areas of the Mideast region suffered from declines in many durable goods industries, such as steel. The rural Southeast—which has the second-highest concentration of manufacturing activity among regions—also began losing factory jobs in the mid-1990s, particularly in textiles and apparel, industries that have been especially hard hit by free-trade agreements. Finally, over the past decade the rural Far West lost jobs in several manufacturing industries, including its important lumber industry. EFFECTS OF THE RECENT RECESSION The recent recession has been a rough one for the nation’s manufacturers, particularly rural ones. Since the end of 2000, U.S. manufacturing employment has fallen more than 10 percent—a loss of nearly 2 million jobs—and was declining slightly even before the recession (Figure 7-2). Factory employment has fallen even more sharply in rural areas during the recent downturn. This sharper decline, combined with the fact that manufacturing makes up a larger share of rural jobs and, especially, rural earnings, has depressed total economic activity in rural areas more than in metropolitan areas over the past couple of years. A major reason why manufacturing has declined more in rural areas recently is that some industries experiencing the sharpest declines are more concentrated there. In particular, employment in the textiles, apparel, and leather industries—which are nearly three times more concentrated in rural areas than in metropolitan areas—has dropped considerably in the last 2

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New Directions in Manufacturing: Report of a Workshop years (23 percent), even after declining throughout the 1990s. Likewise, employment in lumber, furniture, and paper manufacturing—which is also three times more important in rural areas than urban areas—has declined more than most other industries after posting decent job growth during the expansion of the 1990s. Recent activity in the traditional rural industries has not been all bad. Employment in food-related manufacturing—which is nearly twice as concentrated in rural areas as in metropolitan areas—has not declined at all over the past 2 years, showing once again that food demand is fairly resilient in economic downturns. Moreover, not all industries that are more concentrated in cities have outperformed those more prevalent in rural areas. Employment in electronics and instruments manufacturing, for instance—which is twice as concentrated in urban areas as in rural areas—has dropped 16 percent since late 2000. Nevertheless, rural areas have borne a disproportionate share of the recent manufacturing difficulties. As during the expansion of the 1990s, the performance of rural factories in 2001 and 2002 differed somewhat across geographic regions. Notably, however, the decline in rural manufacturing hit all regions hard and was as bad as or worse than the slump in urban manufacturing throughout the country. Rural factories in the Midwest (Great Lakes and Plains regions) held up as well as their urban counterparts, shedding roughly 8 percent of their workforces from the end of 2000 to the end of 2002. Rural areas of these regions were undoubtedly helped by a relatively high concentration of food-related manufacturing and low concentration of textile and wood manufacturing. On the other hand, rural factory employment in the eastern, southern, and western United States fell approximately 40 percent more than did urban factory jobs in those parts of the country. The performance of rural manufacturing in the recent recession—that is, an earlier and sharper decline than in urban manufacturing—differs from trends in the two previous national recessions. During the relatively brief recession of 1990-1991, manufacturing employment at the beginning of the downturn fell almost equally in rural and urban areas before picking up in rural areas as the recession neared its end. Rural manufacturing employment then surpassed its late 1980s peak twice during the 1990s, while urban factory jobs never recovered. The decline in factory employment during the more lengthy and painful recession of 1981-1982 also showed little difference between urban and rural areas. But, like the 1990-1991 recession, rural factories began adding jobs more quickly than urban areas at the end of the downturn, again reflecting some shift in manufacturing from urban to rural areas to reduce labor costs. OUTLOOK FOR RURAL MANUFACTURING The short-term outlook for rural factories coming out of this recession appears bleaker than it did following past recessions. Rural areas have suffered much more from plant closures than have cities during the recent downturn and face ongoing challenges from globalization and the rapid introduction of new technologies. The longer-term outlook for rural manufacturing depends largely on how it responds to these challenges. The recent trend in factory closures does not bode well for rural manufacturing. While the share of factory layoffs in metropolitan areas over the past 2 years that are a result of plant shutdowns has remained similar to pre-recession levels, the share in rural areas has risen considerably. From 1996 to 2000, plant shutdowns were responsible for 20 percent of all urban manufacturing layoffs and for only a slightly higher percentage of rural factory layoffs. By the third quarter of 2002—the most recent data point available—plant closures still accounted for less than a quarter of factory layoffs in cities but were responsible for half of all rural manufacturing layoffs. Given these figures, it looks as though a sizable portion of rural manufacturing as it existed in the 1990s may be gone for good.

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New Directions in Manufacturing: Report of a Workshop To be sure, many rural manufacturers were facing serious challenges even before the onset of the recent recession, largely as a result of the globalization of the economy. The opening of world trade through tariff and trade agreements had been eroding U.S. employment in several rural industries—particularly textiles, apparel, and leather manufacturing—well before 2000. A strong dollar in recent years and the recent recession only exacerbated this situation. Free trade means that many products traditionally produced in rural areas can now be made much less expensively in foreign countries, due to their lower labor costs. Rural factories’ biggest historical advantage—cheaper labor—has largely been taken away. As a result, they must find new comparative advantages. Fortunately, the rapid introduction of new manufacturing technologies may offer new sources of comparative advantage. Technologies that help firms produce and ship high-quality goods more quickly, for example, can potentially give them an advantage over geographically distant firms. In addition, technologies that allow for different types of goods to be produced easily by the same production line could give advantages in supplying customers that have changing needs. Many of these and other types of new technologies—such as those that improve communication flows within factories, more efficiently manage inventories, and automate production runs—have already been instituted recently by many small firms.5 Still, factories in rural areas struggle to adopt many of the new technologies, due largely to an inadequately trained workforce. The 1996 Rural Manufacturing Survey, performed by the U.S. Department of Agriculture, showed that the chief concern of both urban and rural manufacturers is typically the quality of their workforce.6 Contrary to popular perception, the survey found that, in general, rural manufacturers were no less satisfied than their urban counterparts with their workers’ skills. Both urban and rural manufacturers increasingly require their workers to have many nontraditional skills, such as problem-solving and interpersonal skills. But the survey did reveal a discrepancy between urban and rural factories. Rural workers tend to lack computer skills. Training workers to adapt to ever-changing methods of production promises to be a difficult task for rural plant managers for years to come. More recently, other challenges besides workforce quality and globalization have emerged that threaten to slow rural manufacturers’ adoption of new technologies. Most notably, rising insurance costs have forced many small manufacturers to cut back on technology investment (Figure 7-3). One small firm participating in the manufacturing survey conducted by the Federal Reserve Bank of Kansas City reported, “We are canceling plans for capital expenditures in order to be able to continue to provide health insurance and afford property and casualty insurance.” Another plant manager stated, “Insurance costs have depleted cash that was earmarked for capital expenditures.” While concerns about poor sales and excess capacity have also contributed to a lack of investment over the past year, firms tend to recognize the cyclicality of these issues. A couple of recent surveys by industry groups help put the impact of rising insurance burdens on rural factories in perspective. According to members of the National Federation of Independent Business, the single most important problem facing small business in the first quarter of 2003 was the cost and availability of insurance.7 This is in contrast to the first quarter of 2002, when insurance costs and availability ranked sixth among a list of problems, behind taxes, quality of labor, government requirements, competition from large business, and poor sales. Moreover, a recent survey by the National Association of Manufacturers found that small manufacturers have had a much more difficult time coping with rising health insurance costs 5   According to a 1999 manufacturing survey undertaken by the Federal Reserve Bank of Kansas City. 6   H. Frederick Gale, Jr., David A. McGranahan, Ruy Teixeira, and Elizabeth Greenberg. 1999. Rural Competitiveness: Results of the 1996 Rural Manufacturing Survey. U.S. Department of Agriculture. 7   Available at http://www.nfib.com/PDFs/sbet/Feb_SBET.pdf. Accessed November 2003.

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New Directions in Manufacturing: Report of a Workshop FIGURE 7-3 Survey responses indicating concerns for small manufacturers, 2001 and 2003. SOURCE: National Federation of Independent Business, Small Business Economic Trends. Available at http://www.nfib.com/. Accessed November 2003. than have larger firms.8 Since nearly all rural manufacturers are also small manufacturers, the difficulties caused by rising insurance costs have likely hit them disproportionately. CONCLUSION Manufacturing remains a driving force in many of the nation’s rural areas, but it also faces many challenges. Even before the difficulties caused by the recent recession and rising insurance costs, rural factories were dealing with the effects of globalization and the rapid change of technology. It remains to be seen how rural factories cope with these challenges. Given the importance of manufacturing to rural areas, however, one thing is certain: How well rural manufacturers are able to meet these challenges will profoundly affect the economic well-being of a large number of Americans. 8   Available at http://www.nam.org/Docs/ManufacturingInstitute/25223_Health_Care_Part1.pdf. Accessed November 2003.