The supply chain disaster of 2020-2021, strained US-China relations, and formidable dependence on China caused a major corporate rethink.
Written by Wolf Richter of Wolf Street.
In October, $18.5 billion was spent on building U.S. manufacturing plants ($246 billion annually). This is an increase of 73% from the previous year, 136% from two years ago, and 166% from October 2019. What is surprising is the monthly increase. He is up from $12.5 billion in January to $18.5 billion in October.
The construction boom began in early to mid-2021, and spending has tripled since then. About a year later, in July 2022, Congress passed a subsidy package for some manufacturing industries, targeting semiconductor makers ($52 billion) and EV battery makers to build factories.
But these flows of government funds are just the first drop in 2023, as government wheels turn slowly, approvals take time, and disbursements for large projects take time. Most of that is still to come.
In calendar year 2023, spending on factory construction could be close to $200 billion. In the first 10 months, the monthly amount became even larger, already reaching $ 159 billion. If November and December remain flat with October, spending will reach $196 billion by the end of the year.
The stagnation in factory construction until 2021 proves that corporate leaders are looking for cheap labor.
But the supply chain and transportation disasters encountered during the pandemic, the rocky relationship between the U.S. and China, and U.S. companies’ frightening dependence on Chinese suppliers have caused companies to have a major rethink.
It’s not that the United States doesn’t make anything anymore, but… The United States is the second largest manufacturing country after China, and its share of global production is larger than Germany, Japan, and India combined.
However, the United States, the world’s largest economy, lags far behind China in manufacturing and has come to rely heavily on China in many areas. And the supply shortages and supply chain disruptions of 2020-2021 served as a wake-up call.
In the United States, the manufacturing industry’s share of GDP has been on a declining trend for a long time. Bureau of Economic Analysis data only goes back to 2006. At that time, manufacturing accounted for more than 13% of GDP. By early 2020, manufacturing had fallen to 10.5% of GDP. Since then, the share has been steadily increasing.
This year’s construction spending boom will likely see manufacturing make up an even larger share of GDP, although it will take time for factories to open and produce at scale. In other words, this is a time-consuming process and there is a long way to go.
Manufacturing has a massive impact on the economy, which will have second- and third-order effects for decades to come. Construction spending is just his one-time activity to provide buildings and infrastructure. What happens afterwards, the actual production that has second- and third-order effects on the local economy, is far more important.
Companies invest in U.S. factories to manufacture high-value, high-tech products such as semiconductors and automobiles. According to one study, computer, electronic and electrical equipment manufacturers are a major driver of the surge in factory construction. analysis According to the Ministry of Finance.
Industrial robots reduce China’s cost advantage. The costs of automation and industrial robots, which are key to mass production, are about the same in the United States and China. Labor costs in the U.S. are much higher, but bringing manufacturing domestically reduces other costs. These include lower transportation costs, shorter lead times, less geopolitical uncertainty, and less risk of losing or having to abandon intellectual property through technology transfer.
Rising construction costs are not the cause – This year is over. The producer price index for nonresidential buildings peaked in January. Since then, prices have fallen 1.4%. Therefore, construction cost inflation was not a factor in the surge in construction spending in 2023, although it was in 2022. This makes the boom in factory construction spending in 2023 even more surprising.
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