Although the manufacturing sector has experienced a short-term growth spurt recently, most experts agree it may be in for a disappointing long-term decline. “The manufacturing industry, even though it's doing well the last few years and will next year, generally over a longer perspective, it's shrinking as a share of the U.S. economy,” said Jim Haughey, director of research and analytics for Norcross, Ga.-based research firm Reed Construction Data.
For now, FMI reports that the value of construction in 2005 was the strongest it's been since 2001 and predicts positive growth in manufacturing construction through 2010. Still, New York-based McGraw-Hill Construction, which published data on the square footage of construction starts as opposed to the dollar value of construction spending, reports that despite an increase in manufacturing construction starts in 2003 and 2004, 2005 figures dropped about 10 percent to 75 million square feet. McGraw-Hill attributes some of this to lean manufacturing and outsourcing.
But Haughey notes that construction starts begin to slow and decline well before spending as a building expansion matures. Early 2006 numbers by Reed Construction Data suggest healthy growth in construction spending for the coming year. “Manufacturing construction in April, which are the latest figures, was 28 percent higher than the previous year — that's activity at job sites,” he said.
McGraw-Hill predicts a 9 percent increase during 2006 for manufacturing construction starts due, in part, to the need to replace aging plants with more efficient facilities. Old refineries in particular are in need of replacement.
Construction spending in the manufacturing industry typically picks up once industrial capacity utilization reaches about 80 percent, Haughey said, which it reached in 2005. According to the Federal Reserve Board, it's currently at about 82 percent.
The increase in factory capacity use is strongly related to the growing worldwide demand. “The world economy is growing as strongly as it has since records have been kept, since back in World War II. China, India and Brazil — a lot of the larger countries around the world — are growing very strongly,” Haughey said. “Mostly they're making money selling the raw materials to us, then they turn around and buy equipment (from us) to run those commodity extraction businesses.”
In fact, so much of U.S. manufacturing products are exported that exports are growing more than twice as fast as the domestic economy, Haughey said. This, combined with improvements in labor productivity that allow them to shed workers, has provided manufacturers with high profit margins, which in turn has allowed them to invest in new construction. At the same time, the weakening of the U.S. dollar in recent years — down 12 percent in 2003, 8 percent in 2004 and 3 percent in 2005, according to McGraw-Hill — has made it increasingly affordable for foreign countries to purchase products made in the United States. The weak U.S. dollar along with the North American Free Trade Agreement (NAFTA) has lured a number of foreign manufacturers to the United States. NAFTA gives better tax treatment to items manufactured in North America than those made in Japan or Korea. “I think Toyota now has almost as many assembly plants in the U.S. as Chrysler,” Haughey said.
Besides a shift in who is making automobiles in the United States, there has also been a major shift in the geographic location of these assembly plants. As U.S. automobile manufacturers continue to cut workers and shut down plants in states like Michigan and Ohio, foreign assembly plants are opening for the first time in southern states.
Other industries driving manufacturing construction growth include chemical, petrochemical and electronics manufacturers, particularly semiconductor plants. Down the road, cheap labor and the lack of strict environmental and safety requirements may entice many more manufacturers to outsource to other countries. “I think we're following the same path the Europeans did,” Haughey said. “There's very little manufacturing left in most of Europe.”