% change in construction spending Nov ‘07 to Jun”08

Manufacturing 19%
Power 17%
Water 16%
Hotel 15%
Res. Remodeling 12%
Public Safety 8%

Source: US Census Bureau

It is very unusual for a boom in manufacturing construction to occur during a recession.  But this is an unusual recession. The domestic economy is ebbing but exports, especially manufactured goods, are still expanding rapidly to a world economy still growing just below the record pace achieved in 2006-07. The accompanying worldwide commodity price boom has spurred US commodity producers and processors to invest heavily to boost capacity.  It has also spurred US heavy equipment manufacturers to expand capacity in order to meet export orders from foreign commodity producers.

Since last fall, the chemical/petroleum industry has raised construction spending for new facilities by 14%.  Construction spending for transportation equipment industries facilities is up 23%, primarily for aircraft, train engines and freight cars and specialty trucks. The small fabricated metal industry has boosted construction spending more than threefold.  All of this capacity building is to serve foreign markets.

Ahead, the manufacturing construction sector will quickly begin to shrink slowly.  This turnabout will be driven by ebbing foreign economic growth, a pullback in the commodity price boom and the end of $US depreciation which made US manufactures progressively more competitive over the last four years.

The construction boom for power and public safety building projects is not a surprise.  These markets are typically very late in a business cycle with peak activity occurring during the following recession. The recession will reach the power market at the end of the year and the public safety market in mid-2009 and set off a several year period of decline in inflation adjusted construction spending.

Similarly, the current hotel building boom is not a surprise because hotel construction spending jumped over 60% in the prior twelve months as the development surge for casino, resort and other destination hotels came to dominate this small sector. The destination surge is not over yet because these properties heavily serve foreign visitors who will continue to spend their appreciated currencies for “cheap” vacations in the US. Hotel construction spending growth will be modestly higher than rising project costs in 2009.

Water is on the hot list temporarily only because of the timing of public contracts for new water treatment plants. Spending for water distribution lines has dropped sharply in line with the reduced acreage of site development. Further increases in public funding are unlikely now that the purchasing power of tax receipts has been slipping for more than six months.

Next: Six construction markets hardest hit by the recession.

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