Factory construction growth stalls

Manufacturing construction spending has peaked at a $40 billion annual rate—twice the pace in 2003-04—and will change very little over the next two years. Starts of new manufacturing projects declined sharply last year, but no further significant declines are expected over the next few years. As a result, the amount of factory building work under construction is now declining slowly.

Major U.S. industries that have traditionally accounted for most manufacturing construction are still trapped in a long-term secular decline in their world market share. However, the seriousness of factory economic problems was masked during the long economic boom from mid-2003 to early 2006.

The industries with the most serious secular decline problems are autos and light trucks, textiles, metals, and petrochemicals. The problems in those industries cannot be fixed by a pickup in U.S. domestic economic demand. The abrupt transition to sub-par economic growth about a year ago reduced the growth rate of U.S. manufacturing production from 6% to 0% in the last nine months, which resulted in the factory capacity utilization rate change from 81% to 79%.

There has been a similar turnabout in orders and shipments for factory machinery. Almost all manufacturers have been working off surplus inventory since the end of last summer, which caused some facility projects to be delayed. Some projects will start when production returns to the level of current customer consumption, which should be this spring for most industries but a little later for construction materials and later yet for cars and light trucks. Growth in the related warehouse construction market has stopped because of stalled factory construction.