#160 – Inside Our Industry – America’s Factory Building Boom

Posted on | Inside Our Industry

A few weeks back we shared information about the “Investment Boom” and how economic development teams are working to capitalize on new manufacturing projects. Today’s post details why construction of manufacturing facilities is skyrocketing.

America’s Factory Building Boom
Construction spending on factories is soaring, due in no small part to two pieces of legislation
By Justin Lahart, Wall Street Journal, July 3, 2023

Congress passed two measures last year that aimed, in part, to build America’s manufacturing capacity back up. While the ultimate economic ramifications of these moves will take years to play out, this much is certain: If you spend it, they will build.

On Monday, the Commerce Department reported May construction spending figures, with overall spending rising a seasonally adjusted 0.9% from a month earlier. Once again, an important piece of that was spending on construction of manufacturing facilities. This was up 1% in May from April, putting it up an eye-popping 76.3% from a year earlier. In the first quarter, Commerce Department figures show that spending on manufacturing structures came to nearly 0.5% of gross domestic product—the most since 1991. In the second quarter, that GDP share looks destined to be higher.

Chalk it up to the CHIPS and Science Act and the Inflation Reduction Act, both passed in August last year. The Chips Act includes incentives for investing in semiconductor production, while the IRA includes incentives for items such as the production of electric vehicles and using domestically produced content. Economists at Goldman Sachs note that the uptake in these incentives appear to be surpassing earlier estimates.

Part of what makes the surge in manufacturing construction so striking is that it is occurring even though sentiment among manufacturers is rather low. Also on Monday, the Institute for Supply Management said that its index of manufacturing activity slipped to 46 in June from the previous month’s 46.9. Anything under 50 represents a contraction in factory activity. This is likely a reflection of the fact that while the economy still appears to be growing, it is growing slowly, with Americans buying less of the manufactured goods they stocked up on during the pandemic. Moreover, data on manufacturing production from the Federal Reserve and elsewhere suggest readings from ISM’s survey-based measure are a bit too dour.

The extent to which all this building will make for a sustained increase in manufacturing activity won’t be known until after that capacity comes online. But for now, even as demand for manufactured goods remains in a post-pandemic hangover, the investment that manufacturers are making in new capacity is a clear positive for the economy.

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