Construction spending on manufacturing plants jumped 25% in the second half of 2004, remained at that level early in 2005—even when manufacturing production stalled—and is now expected to increase 20% more by the end of next year as factory production resumes growing.
Three industries accounted for most of the added spending. Over the past year, electronics accounted for 38% of the added spending, transportation equipment 29%, and food and beverage 22%. The large chemical industry accounted for 11% of the added spending, while the wood, metal, furniture, electrical, plastic, paper, textiles, and apparel industries reduced their construction spending.
The same three industries will account for most of the added spending expected through next year, with significant expansion also occurring in the electrical and machinery industries. Factory capacity utilization has risen to over 80% (the usual threshold for a burst of expansion) in the electronics, electrical machinery, food and beverage, motor vehicle, and machinery industries.
The pressure on available capacity and the need for expansion will increase. Manufacturers added 1.2% more capacity in the last year through June, while factory production increased 3.9%. By next June, production is forecast to be 6% higher, with the manufacturing capacity utilization rate reaching as high as 83%—a tad short of the 85% reached at the peak of the last two business expansions. Manufacturing construction spending will continue expanding strongly into 2007.