street sense
U.S. Workers Face Lean Times
Loss of manufacturing jobs is changing blue-collar families' lifestyles. Some stocks will be affected.

It's puzzling to many Americans that the economy could be picking up steam again while unemployment continues to grow. Common sense and past experience tells us that a recovery in the economy should be closely followed by an increase in hiring.

It's well known by economists that in the early stages of an economic recovery, employers tend to prefer to put workers on overtime rather than making new hires. But once they're convinced that the recovery is for real, employers will take on additional workers. We've now reached the stage of the recovery in which new hiring should be occurring, but it's not happening.

Why are we still waiting to see a better job market? It's a good question and one that I'll attempt to explain in this month's column.

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Jobs Are Fleeing the U.S.

Unfortunately for American workers, U.S.-based manufacturing companies are transferring jobs to so-called "cheap labor" countries as fast as they can. It's turned into a mass exodus of manufacturing jobs, and it's destined to continue as long as the wage gap between American and "offshore" labor remains wide.

The ultimate result of this job transfer will spell doom for the United States as a manufacturing country. What company will pay $18 an hour to an American worker to make sparkplugs or electronic connectors when it can get the same quality product from an Asian or Mexican worker who makes the equivalent of $2 or $3 an hour?

This shift of manufacturing offshore is allowing companies to increase their profits, making it appear as if an economic recovery is taking hold. But at the same time, the continuing loss of high-paying manufacturing jobs is forcing millions of working-class Americans into a lower standard of living. It will be difficult to sustain any kind of recovery in which millions of American families are in dire financial straits.

Be Aware of These Trends

If American labor is truly overpriced, as it appears to be, the only realistic scenario is for our workers to accept lower wages if they want to hold jobs. With less spendable income, these workers won't be able to buy a new car or SUV every couple of years and they'll have to limit their spending on such things as vacations and dining out.

Investors should be aware of these employment trends because changes in spending patterns will have a real impact on a wide variety of companies and industries.

For example, lower-paid workers keep their cars for many more years than highly paid workers. Instead of regularly visiting the new car showrooms, lower-paid workers spend more money on repairs to keep their older vehicles running.

Thus, General Motors may not be a good investment in coming years, but a replacement auto parts company such as Genuine Parts may well be. Ford may not prosper, but a car service specialist such as Pep Boys may do very well.

If workers have to cut back on vacations and dining out, they'll probably involve themselves in more activities that center around the home, perhaps by increasing their cable TV choices or by initiating more do-it-yourself home improvement projects. So what spells bad news for hotels and resort destinations could be good news for cable TV operators and home centers such as Lowe's and Home Depot.

In any event, American workers are now selling their services in a global marketplace, and they have priced themselves out of the market, at least for now.

Ophthalmology Management Senior Associate Editor Jerry Helzner has written more than 50 articles on stock investing for Barron's. He has been a regular stock market columnist for other business publications and was a member of the equity research department of a major regional brokerage firm.