Dot-com downfall dams up industrial work

From the look of last year's trends in construction spending for new industrial plants and warehouses, one would never know that the nation's manufacturing sector was effectively in a recession throughout the second half of 2000. Despite weaker industrial production, declining orders and fading capacity utilization, spending on manufacturing buildings soared last year.

After recording only modest net growth between 1996 and 1998 — and plunging by 13.8 percent during 1999 — total industrial construction spending increased by 16.5 percent between 1999 and 2000.

Much of the spending was for e-commerce distribution and fulfillment facilities and for an expansion in semiconductor fabrication plants, yet neither area is likely to contribute anything more to growth during 2001.

But there's no disputing that industrial construction enjoyed an outstanding rebound in 2000, and some of the momentum has carried over into the early months of 2001. January spending for manufacturing and warehouse space came in 40 percent higher this year than it did in 2000.

The driving force behind this surge in spending has been the urgent push by manufacturers to make the kinds of investments that increase production efficiency, reduce operating costs and enhance worker productivity. Although the majority of these capital-spending dollars have gone towards buying computers, machine tools, inventory-control systems and the like, an increasing share has gone towards expanding or renovating production facilities.

Between February 2000 and February 2001, total U.S. manufacturing production capacity increased by 4.9 percent. Over the same 12-month period, manufacturing industrial production grew by a scant 0.9 percent. Consequently, industrial capacity utilization in this country dipped to just 78.1 percent during February — its lowest level since the last recession.

Clearly, this trend doesn't bode well for the industrial construction sector, and much slower growth in spending is forecast for this year and next. Medium-term and long-term demand for new industrial space is closely correlated with industrial output, export growth and U.S. retail sales — all factors that have been weakening in recent months.

The year started out well with that stratospheric 40 percent January-to-January growth trend, but the industrial market quickly came back down to earth. Anecdotal evidence suggests that manufacturers are already becoming more cautious about adding or retrofitting industrial space during this period of economic uncertainty. Nevertheless, because it is expected that the downturn will be relatively shallow and short-lived, some growth in overall industrial construction spending is forecasted during 2001 and 2002, but nothing approaching the strong double-digit annualized gains that have prevailed for the past 18 months.