US Manufacturing Faring Better Than Expected

WASHINGTON, DC-Though signs of trouble have not disappeared, new reports suggest the US manufacturing sector is showing more resilience than anticipated. Not only was the drop in durable goods orders for April barely a third of what was predicted, but grassroot industrial plant construction continues to experience explosive growth.

The Commerce Department reports that orders for durable goods dropped 0.5% in April. But when transportation industries are removed from the picture, orders actually rose 2.5%, the biggest gain in nine months. Moreover, orders for electrical equipment and appliances surged 27.8%, the biggest jump on record. Demand for machinery, primary metals and communications equipment also increased, by 4.2%, 2.8% and 2.2%, respectively. Had it not been for a 24.4% plunge in commercial aircraft orders and very small decrease in automobile orders, the results would have been positive.

Thus, it’s less surprising to learn that construction of grassroots manufacturing plants is proceeding at an even more rapid clip than in 2007, which itself marked a banner year. Grassroots refers to plants being constructed from the ground up with no previous site improvements. According to the most recent research from Industrial Info Resources of Sugar Land, TX, in Q1 there were 881 grassroot plants with a total value of $129 billion under construction in the US. This compares to 656 such plants valued at $88 billion for the same period a year ago and 601 plants valued at just over $60 billion in ’06.

To some extent the figures are misleading because the data encompasses power and fuel and mineral processing plants as well as manufacturing facilities and includes civil as well as private projects. Nonetheless, they all contribute both directly and indirectly to industrial real estate demand, especially in regard to distribution and storage.

A forecast released in late May by the Institute for Supply Management in Tempe, AZ provides additional data to indicate the economy may not be slipping into a recession. The organization’s 2008 Semiannual Economic Forecast says expectations for the remainder of 2008 are encouraging in both the manufacturing and non-manufacturing sectors. Based on a survey of the nation’s purchasing and supply executives, the forecast found that 42% of respondents expect this year’s revenues to be greater than last year’s, while 31% expect them to be smaller and 27% expect no change. For those predicting improvement, the average projected increase was 9.2%.

The average projected increase in manufacturing, however, was only 1%, a significant decline in expectations from December, when manufacturing executives predicted a 6.8% increase in revenues. According to the institute, with operating capacity at 78.6%, expected capital investment growth at 1% and projected price increases of 8.5%, manufacturers will need to focus on cost cutting to offset lower revenue growth and higher input costs.