#657 – Rural Manufacturing Survival and Its Role in the Rural Economy

Posted on | The Agurban

Agracel prides ourselves in the fact that we are unique in where we do business, primarily in agurban, or non-urban, markets. A recent report from the Economic Research Service (ERS) division of the United States Department of Agriculture, contained some valuable information regarding rural manufacturing. Below are some key points from that report.

Rural Manufacturing Survival and Its Role in the Rural Economy

Manufacturing provides more jobs and higher earnings in rural areas than many other sectors, including agriculture and mining. Manufacturing is also relatively more important to the rural economy than to the urban economy.

However, U.S. manufacturing employment has been declining since the 1950s. Between 2001 and 2015, a period that included the 2001 and 2007-09 recessions, manufacturing employment fell by close to 30 percent. Because of manufacturing’s prevalence in rural America, this decline hit rural areas disproportionately hard. A better understanding of the factors affecting the survival of rural manufacturing plants may help develop strategies to retain these jobs.

The manufacturing sector’s share of employment and earnings in rural (nonmetro) areas began to exceed its share in urban (metro) areas in the 1980s, when import competition forced domestic manufacturers to lower costs. Wages, property taxes, and land prices are generally lower in rural areas. And despite the sector’s declining employment since the 1950s, manufacturing jobs still represented 14 percent of rural private nonfarm jobs in 2015 (compared to 7 percent for urban). As a share, manufacturing earnings are even more important to rural America. Manufacturing earnings represented 21 percent of rural private nonfarm earnings in 2015 (compared to 11 percent for urban).

Manufacturing provides a higher share of total jobs and total earnings in rural America than other sectors commonly associated with rural places: production agriculture and mining. In rural America in 2015, manufacturing jobs totaled 2.5 million, while farm jobs stood at 1.4 million and mining jobs (including oil and gas extraction) stood at 0.5 million. Rural earnings in 2015 included $158.1 million from manufacturing, $45.4 million from farming, and $37.3 million from mining.

Rural manufacturing is no longer the driver of job growth that it once was: 71 percent of U.S. counties experienced a decline in manufacturing employment between 2001 and 2015. Counties with the largest relative declines were concentrated in the Eastern United States, the traditional hub of U.S. manufacturing.

In many communities, the closing of a manufacturing plant can reduce local employment, earnings, and government tax revenue. To improve understanding of the factors affecting the survival of manufacturing plants, ERS studied manufacturing plant survival for a nationally representative sample of plants that responded to the 1996 ERS Rural Manufacturing Survey. ERS followed the plants quarterly until the end of 2011, if they survived that long. The study found that rural plants have a higher survival rate than urban plants. All else being equal, plants in urban counties were 23 percent less likely to survive than plants in rural counties.

Survival rates also varied by ownership structure: Overall, independent plants (single-unit plants with only one physical location) had a 59-percent survival rate over the 15-year period, while multiunit plants had a 50-percent survival rate. Independent plants located in rural counties had the highest average survival rate (62 percent). By comparison, urban and rural multiunit plants (plants part of a firm with multiple locations, such as branch plants or firm headquarters) had similar survival rates. This suggests that independent plants drove the rural survival advantage during the period of manufacturing decline and two recessions. That independent manufacturing plants were more likely to survive the broader economic shocks occurring over the study period could be due to their being more likely to have close ties to the community. Multiunit plant survival was more unpredictable, likely because multiunit plants are affected by decisions made at a distant headquarters that apply to all its plant locations.

The financial investment necessary for operating modern manufacturing plants may be reducing manufacturing plant churn (plant startups and shutdowns). The amount of financial capital needed to start up a manufacturing plant is higher than the investment necessary to start up many other types of business. Furthermore, once in operation, the investment made is an incentive to stay open—particularly in rural areas where there are fewer opportunities to reuse a plant’s infrastructure. Although technology has increased the possibility of banking at a distance, reduced contact between lenders and rural borrowers puts rural businesses at a disadvantage. It is this commercial credit market-failure that is the justification for policies oriented toward increased access to financial capital for rural businesses.

Full report.