Following a two-year building boom, manufacturing construction spending will slide through 2008

After two years of booming sales, U.S. manufacturing market growth is expected to closely match overall 2007-08 economic growth, which is approximately 2.5-3% Construction spending doubled during the period of mid-2004 to mid-2006, but has slipped slightly since last summer and will slowly drop through the end of 2008.

The value of manufacturing construction starts dropped 34% last year, according to Reed Construction Data, and will drop another 20% by the end of next year. Manufacturers do not anticipate major new capacity needs in the next few years because factory capacity utilization is now a comfortable—and profitable—80-81%. Simply maintaining current investment budgets will fund any modest need for added capacity.

The chemical industry accounts for the entire 14% increase in manufacturing construction spending experienced during the last 12 months. Part of their increase is due to hurricane rebuilding and part is due to a surge in world commodity prices during 2004-06. Another contributing factor is the U.S. manufacturers' improved price competitiveness in world markets resulting from dollar depreciation. The U.S. dollar fell 2.5% last year, making U.S. products more competitive throughout the world. The accumulated decline is 17% since the peak value of the dollar early in 2002. The U.S. dollar has weakened about 30% in Canada and Europe and has recently depreciated in China with a cumulative 6% fall over the last two years. The boost resulting from a weaker dollar is preventing the sharp collapse in manufacturing construction spending, which has occurred at the same point in previous business cycles.