Manufacturing construction hits ‘record level’ as supply chains return to U.S: Economist

Dodge Construction Network Chief Economist Richard Branch joins Yahoo Finance Live to discuss manufacturing construction activity levels in the U.S. and global supply chains.

Video transcript

JARED BLIKRE: Welcome back. More American companies are moving their manufacturing facilities back to the US. And that's while supply chain woes and strict COVID-19 lockdowns in China are creating more trouble for production capacity. Now, let's bring in Richard Branch. He is a Dodge Construction Network chief economist. And I guess we're not surprised about this, but what is the extent to which this huge phenomenon is ongoing?

RICHARD BRANCH: Sure Jared. Thank you so much for having me here today. It's really exciting news. So at Dodge Construction Network, what we do is we track construction activity at the project level. We've been tracking projects going back into the 1960s. And when we look at manufacturing, construction in particular, over the last 12 months, the 12 months ending May 2022, manufacturing construction starts have totaled $41.6 billion over this last 12 months. That's 161% more than the 12 months ending May 2021. And in terms of our dataset, that's a record level of activity for manufacturing construction.

- And in terms of how this construction is coming back to the US and what people are actually using this for in terms of commercial real estate space, what are trends that you see in there?

RICHARD BRANCH: Sure. In terms of the type of manufacturing projects we're seeing, it's really the greatest hits of the snarled supply chain. We're seeing chip fabrication plants, of course, not potato chips but semiconductors. We're seeing steel mills, EV battery factories which is interesting considering the discussion you just had about EV manufacturing. Food production, as well as sawmills and other building material products.

JARED BLIKRE: And can you tell us where some of these projects-- where they might be taking place? Is it a hub? For instance, I'm noting Phoenix. Intel is building two plants outside the city. Taiwan Semi is there. So Phoenix may be benefiting from some kind of influx of construction. Any other hotspots you're looking at?

RICHARD BRANCH: Sure. You hit it on the head there with Phoenix and Arizona, in particular. Texas is also a hub of manufacturing construction. And in general, the southeastern portion of the United States, too, where construction costs are a little bit lower and demographic trends means there's an ample supply of workers.

- Now, we know that one of the main reasons that a lot of companies sort of have their businesses overseas for manufacturing, cheaper cost of labor, perhaps, cheaper cost of getting their buildings up there as well. Is there a danger, though, that when it comes to-- in a tight labor market, when you're trying to get more manufacturing back, that that might end up weighing on this growth that we're seeing?

RICHARD BRANCH: I do think that's a significant risk that the manufacturing sector needs to face in the years to come. Regardless of which sector of the economy we look at, the labor force is a significant issue. When we start talking about manufacturing, and in particular high-tech, high-value add manufacturing like these EV battery plants, like chip fabrication plants, that situation is even more acute.

If you look at data from the Bureau of Labor statistics for total manufacturing, 800,000 open jobs in the manufacturing sector right now. That's a record as far as the BLS is concerned. And if that's sustained, that could certainly constrain or put a cap on how much manufacturing can come back to the United States.

JARED BLIKRE: And Richard, how far along are we in the process? When I think of chip fabrication plant, so let's take years to build. Other plants may not, but when are we going to be not necessarily in the clear but much better positioned for another supply chain crunch?

RICHARD BRANCH: Well, I think you're really going to start to see the benefits of these manufacturing plants coming online over the next two years ago-- next two years or so. As you said, it varies depending upon the kind of manufacturing that we're looking at. But these manufacturing plants, they do go up pretty quick so that should help.

But in terms of as we forecast this level of activity, we think this trend certainly has momentum in the years to come. And we're looking at continued records here over the next five years for manufacturing construction.

- I mean, if we look at the numbers here, more than 90% of people surveyed by UBS saying that they're either in the process of moving production out of China or had plans to do so. How surprising is that number to you given, obviously, how much they were affected by that wake up call with the pandemic really snarling those supply chains?

RICHARD BRANCH: Yeah, not surprising at all. You know, I think it's certainly clear that manufacturers want more control and I guess more predictability over their supply chains than what they've gotten used to over the past couple of years. And that's a huge incentive to set up shop here in the United States. And just from a tonality perspective, it's been hard to find positive news in the economy of late. And I think this is certainly a positive story.

- And how do you think the strong US dollar is going to affect what we've seen with some of these factories trying to come back home?

RICHARD BRANCH: It's certainly, again, another risk, another negative side to the potential for manufacturing construction to come back. However, you know, that does need the calculus of this, does need to be weighed against the supply chain issues. The supply chain issues that currently exist certainly aren't going away any time soon. So at least for the near to middle term, I, again, continue to think that the manufacturing sector here has some legs to run.