Manufacturing production jumps; spending to follow at year's end

June 01, 2004 |

The materials shortages, rising selling prices, and long delays in the delivery of new factory equipment that often accompany fast-paced growth were all there at the beginning of the year when U.S. manufacturing production began a period of rapid expansion, which is expected to last several years. But these negatives have yet to impact the construction or renovation of manufacturing facilities.

Manufacturing jobs are up 40,000 YTD through April. March manufacturing orders increased 3.3% with order backlogs also rising. Shipments of industrial machinery soared 14% in March, offsetting the decline in the previous 15 months.

Monthly factory construction spending totals continued to slip lower through March, but a sustained recovery is expected to begin during the spring. Initially, spending will be focused heavily on renovation to accommodate new processes and products. Given the usual lag time between production increases and new investment, no significant space expansion or speculative building is expected until the end of the year.

While manufacturing capacity utilization (excluding electronics) is only 77.4%, below the usual 80% threshold when sustained investment typically begins, the Federal Reserve Board is including a lot of mothballed facilities in its figure. Mothballed facilities require significant renovation before being brought back into use. The Institute of Supply Management's parallel measure of more readily available capacity is near 85%, well within the typical threshold of sustained investment. Similarly, most real estate investment monitors put vacant industrial space at well under 10%. Initially, hot markets will be in California, where facilities are needed to service rapidly rising Asian trade, and in the Midwest off-road machinery centers.

Manufacturing construction spending

Billions of dollars, annual rate

Quarter Year $
1 2004 1.34
2 2004 1.35
3 2004 1.42
4 2004 1.50
1 2005 1.59
2 2005 1.67
3 2005 1.75
4 2005 1.84
Source: Census Bureau
Forecast (f): Reed Research Group

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