The industrial vacancy rate held steady at 11.5% in the first quarter of 2003 and is expected to trend down slightly beginning in this summer. However, it will not be significantly lower for more than a year. Cyclical in nature, manufacturing is the weakest sector of the economy. The business recovery, twice interrupted by war, is still in an early stage when a glut of industrial space is typical. This part of the problem will be progressively corrected over the next two years.
But much of the current surplus industrial space results from a non-cyclical shrinking of the world market share of U.S. manufacturing as the dollar appreciated 34% from 1995 to early 2001. Many U.S. factories that could not compete with this cost disadvantage either shut down or moved out of the country.
Although the dollar has since reversed about a quarter of the appreciation and price disadvantage, the impact of the long rise in the dollar is still being felt in many manufacturing industries that are now implementing plans initiated a few years ago to leave the U.S. Similarly, it will take several years for the cheaper dollar to slow imports and relocate production to the U.S.
The combined impact of a cyclically stronger economy and a weaker dollar should result in a small rise in manufacturing construction spending later this year and a larger gain in 2004. Even this will not be enough to stop the decline in the value of the manufacturing capital stock, net of depreciation. If the dollar declines further, which is the consensus outlook, the U.S. market share will keep rising and the industrial vacancy rate will keep falling well beyond 2004.