South and Midwest lead the factory spending spree

With the help of a spending surge in late 2004, manufacturing construction spending increased 20.4% in 2005. But since December 2004, spending has been stalled at a $28 billion annual rate.

Manufacturing construction spending is expected to expand at a 10% annual pace in 2006–07. A chief indicator of this rise is the value of manufacturing construction starts, which is up 32% year to date through October from the same period in 2004. Nearly 80% of the starts were in the South and Midwest, with Illinois, Georgia, South Carolina, and California having the highest value of construction starts.

The recent pickup in manufacturing construction activity has been widespread, excluding food and beverage manufacturing. Gains of more than 50% were seen in both the electronics and motor vehicle manufacturing sectors. The large chemical industry experienced small gains.

Asian manufacturers are building electronics and vehicle production capacity in the U.S. to get inside the NAFTA (North American Free Trade Agreement) tariff wall. Asian supplies will become relatively more expensive than U.S.-built supplies as the U.S. dollar continues to depreciate.

Manufacturing capacity utilization is currently 80%, the typical threshold for a significant acceleration in capacity investment. Capacity constraints are the most binding in petroleum, food, nonmetallic mineral products, primary metals, wood products, heavy trucks and off-road vehicles, plastics, and electrical products. There is surplus capacity for paper, printing, textiles, apparel, and chemicals.

The capacity utilization rate will push over 82% in 2007, assuring rising spending for factory construction beyond 2007.