Although it's experienced a short-term growth spurt recently, most experts agree the manufacturing sector may be in for a disappointing long-term decline. For example, the value of manufacturing construction skyrocketed in 2005 with an 18% growth over 2004 — the greatest increase of any construction segment last year, according to Raleigh, N.C.-based research firm FMI. Yet experts caution that this dramatic short-term growth will be tempered in the long run by foreign competition. “The manufacturing industry, even though it's doing well the last few years and will next year, generally over a longer perspective, it's shrinking as a share of the U.S. economy,” says Jim Haughey, director of research and analytics for Norcross, Ga.-based research firm Reed Construction Data.

For now, FMI reports that the value of construction in 2005 was the strongest it's been since 2001 and predicts positive growth in manufacturing construction through 2010 (Chart). Still, New York-based research firm McGraw Hill Construction, which published data on the square footage of construction starts as opposed to the dollar value of construction spending, reports that despite an increase in manufacturing construction starts in 2003 and 2004, 2005 figures dropped about 10% to 75 million square feet. McGraw Hill attributes some of this to leaner manufacturing and outsourcing. But Haughey notes that construction starts begin to slow and decline well before spending as a building expansion matures. Early 2006 numbers by Reed Construction Data suggests a healthy growth of construction spending for the coming year. “Manufacturing construction in April, which are the latest figures, was 28% higher than the previous year — that's activity at job sites,” he says.

McGraw Hill predicts a 9% increase during 2006 for manufacturing construction starts, due in part to the need to replace aging plants with more efficient facilities. Old refineries in particular are in need of replacement. According to McGraw Hill, in October 2005 President Bush called for construction of new refineries to help alleviate high gas prices and requested that Congress pass legislation to ease regulations on refinery construction, noting that a new refinery had not been built in the United States since the 1970s.

Construction spending in the manufacturing industry typically picks up once capacity reaches about 80%, Haughey says, which it reached in about the middle of 2005. According to the Federal Reserve Board, it is currently at about 82%. The increase in factory capacity use is strongly related to the growing worldwide demand. “The world economy is growing as strongly as it has since records have been kept, since back in World War II. China, India, and Brazil — a lot of the larger countries around the world — are growing very strongly,” Haughey says. “Mostly they're making money selling the raw materials to us, then they turn around and buy equipment [from us] to run those commodity extraction businesses.”

In fact, so much of U.S. manufacturing products are exported that exports are growing more than twice as fast as the domestic economy, Haughey says. This, combined with improvements in labor productivity, allowing them to shed workers, has provided manufacturers with high profit margins, which in turn has allowed them to invest in new construction. At the same time, the weakening of the U.S. dollar in recent years — down 12% in 2003, 8% in 2004, and 3% in 2005 according to McGraw Hill — has made it increasingly affordable for foreign countries to purchase products made in the United States. The weak U.S. dollar along with the North American Free Trade Agreement (NAFTA) has lured a number of foreign manufacturers to the United States. NAFTA gives better tax treatment to items manufactured in North America than those made in Japan or Korea. “I think Toyota now has almost as many assembly plants in the U.S. as Chrysler,” Haughey says.

Besides a shift in who is making automobiles in the U.S., there has also been a major shift in the geographic location of these assembly plants. As U.S. automobile manufacturers continue to cut workers and shut down plants in states like Michigan and Ohio, foreign assembly plants are opening for the first time in southern states like Texas, Tennessee, Kentucky, and Arkansas, according to Haughey. Other industries driving manufacturing construction growth include chemical, petrochemical, and electronics manufacturers. In particular, demand for semiconductor plants is growing.

Down the road, cheap labor and the lack of strict environmental and safety requirements may entice many more manufacturers to outsource their manufacturing to other countries. “I think we're following the same path the Europeans did,” he says. “There's very little manufacturing left in most of Europe.”

That doesn't mean U.S. manufacturing will ever be entirely outsourced. “Some things we can't buy from China, like a loaf of bread,” Haughey says.