The driver: computer, electronic, and electrical manufacturing.
By Wolf Richter for WOLF STREET.
The amount spent on building manufacturing plants in May in the US jumped by 73% from a year ago, and by 147% from May 2021, to $15.7 billion, according to Census Bureau data today. This by far outpaces the increase in construction costs (more on that in a moment).
Over the six years between 2015 and 2020, construction spending on factories has stagnated roughly between $6 billion and $7 billion a month. But in the spring of 2021, spending began to rise, and then surge amid the global supply chain chaos raging at the time. The driver behind the surge of construction spending now is computer, electronic, and electrical manufacturing.
Construction spending on factories is interesting because of the long-term outlook it provides on the US manufacturing sector – particularly regarding computer, electronic, and electrical manufacturing.
Nonresidential construction spending overall in May rose 17% year-over-year and 26% from two years ago to a record of $90 billion, driven in part by surging construction costs.
Nonresidential construction, in addition to factories, includes: lodging, office, commercial, healthcare, education, religious, public safety, amusement & recreation, transportation, communication, power, highway and street, sewage and waste disposal, water supply, and conservation and development.
Nonresidential construction spending is very seasonal with a low in January and a high in the summer (green line). The red line reflects the 12-month moving average, which irons out the seasonality:
We’ve already seen another sign the economy is flying at cruising altitude and refuses to land, even with short-term interest rates over 5%: Multifamily Construction Starts Spiked to Highest since 1986, Single-Family Starts Bounce.
The share of manufacturing within nonresidential construction has doubled over the past two years, from a share of 8.9% in May 2021 to a share of 17.5% in May 2023. By looking at the percentage share, we eliminate the effects of rising construction costs:
Computer, electronic, and electrical manufacturing plants have been the primary drivers behind the surge of factory construction, according to an analysis in June by the Treasury Department.
These types of plants had been a relatively small component of factory construction over the past few decades. Now these plants dominate construction spending on factories, according to the Treasury analysis.
Adjusted for inflation based on construction costs, “real” spending on the construction of plants for computer, electronics, and electrical manufacturing has nearly quadrupled, according to the Treasury Department analysis last month.
The boom in manufacturing construction spending started in early 2021, likely in response to the pandemic era supply-chain chaos and transportation nightmares that wreaked havoc on globalized supply strategies and led to previously unimaginable shortages.
While the boom in manufacturing construction started over a year before the CHIPS Act was passed in August 2022, it is likely that the CHIPS Act has since then further accelerated the construction of manufacturing plants for tech products.
In its analysis, the Treasury Department said that the surge in construction of manufacturing plants appears to be a US phenomenon, when compared to other advanced economies:
- “Japan has seen increases in the floor area of new manufacturing over the past year, but remains below pre-pandemic levels.
- “Germany’s real new construction spending on factory and workshop buildings has remained relatively stable over the past decade.
- “Notably, the United Kingdom and Australia did see meaningful increases in real industrial construction in 2022, rising about 40 percent from 2021 levels. But those series have leveled off since then, over the period in which U.S. manufacturing construction has nearly doubled.”
An investment boom in US factories is a welcome turn of events because “real” manufacturing output – adjusted for price increases – has been roughly flat for 17 years, amid rampant offshoring and globalization of supply chains by US companies, the very thing that then got these companies tangled up in chaos in 2020 and 2021.
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