Resurgence of U.S. Factories Sparks Construction Boom

Suzanne Berkery


Resurgence of U.S. Factories Sparks Construction Boom and Economic Growth

Demand for new factories in the U.S. is helping drive growth in construction spending that is cascading across industrial supply chains, says the Wall Street Journal. The expansion is reaching manufacturers of construction equipment, trucks and other industrial goods, and is providing a boost to the U.S. economy despite rising interest rates and slowdowns in other sectors.


The US administration is trying to reverse, at least for certain industries, the long-term deindustrialization of its economy. Along with European countries, it’s seen a slide over several decades in the share of the workforce employed in manufacturing, as Asia took over the role of the world’s factory powerhouse.


China now accounts for about 30% of global value added from manufacturing, roughly double the US share, according to the World Bank.


With supply chains causing problems throughout the global economy, many US companies that depended on overseas suppliers have been shifting their focus to sources of parts and goods much closer to home.


As part of the most ambitious US industrial policy in decades, the government is offering subsidies worth tens of billions of dollars for companies to make all kinds of key products — from semiconductors to electric cars and their components — in the US.


The CHIPs and Science Act is aimed at shoring up the most obvious input disruption that occurred during the pandemic—the shortage of semiconductor chips. The bill provides subsidies for domestic production with the hope that the 2021–2022 bottlenecks in that sector can be avoided in the future, even in the face of potential geopolitical turmoil.


The Biden administration says the programs, rolled out amid escalating tension with China, will help secure supply chains for strategic goods and bolster US leadership in industries like clean energy.


But how can we know if industrial policy is really working? We could monitor the production of the goods and parts that industrial policy is trying to produce— more solar panels, semiconductors, electric cars, and so on. But it takes time to build up production, so in the meantime, we could focus on how many factories are being built to make these goods.


Intel is investing $12 billion on two chip factories near Phoenix that are due to open in 2024. The new US plants will help meet domestic demand for the billions of chips now used in an array of products from computers to cars. Ford is investing $3.7 billion in its key manufacturing sites in Michigan, Ohio and Missouri. US Steel is investing in a $3 billion steelmaking factory in Osceola, Arkansas. This is to name but a few.


Factory construction spending more than doubled in one year, after being essentially constant for decades. Following the announcement of the CHIPS Act in July 2022 and the Inflation Reduction Act in August 2022 construction spending in the manufacturing industry increased since June 2022, from $90 billion to $189 billion [according to data recently published by the Census Bureau] In fact, big investments by companies like Intel and Ford — making chips and Electric Vehicles — figure prominently in these numbers.


The adjusted 0.3% rate of growth in construction spending in March 2023 included a 4.6% gain in manufacturing-related construction.


New factories are driving demand for construction materials, including steel, as well as the systems and equipment needed to operate the plants once they are completed.


These are large factories that take billions of dollars and years to build.


Strength in such construction projects has helped Texas-based Caterpillar and other manufacturers exceed expectations of investors and industry analysts, some of whom have worried that economic turbulence could cut into sales or diminish profit guidance. Caterpillar’s sales of machinery and engines from North America rose 32% in the first quarter of 2023 from the same period a year earlier.


Caterpillar [CAT_US] Chief Executive Jim Umpleby said in April after the construction-equipment maker’s quarterly sales rose by 17% from the same period last year and profit increased by 26%. “Our first-quarter results lead us to expect that 2023 will be even better than we previously anticipated.” Caterpillar trades on a forward P/E of 13x and yields just over 2%.


An estimated 5mm tons of steel is needed for every $100 billion in infrastructure spend. The $975 billion in combined funding or tax incentives announced is expected to see steel demand remain elevated for the rest of the decade. On top of that the IRA driving significant investment in clean energy and steel demand for wind, solar and transmissions projects is expected to add another 2mm to 3mm tons per annum to demand.


For North Carolina-based steelmaker Nucor, continued robust sales of building joists, warehouse racks, overhead doors and other products made from the company’s steel helped boost profit from its steel-products business by 42% from the first quarter last year to $971 million.


Nucor (NUE_US) is the largest and most diversified steel products company in the US and is well placed with its domestic production capabilities, low carbon footprint and strong balance sheet. In their Q1 earnings call they identified 34 new projects which represent $374 billion of semi-conductor factories that are going to be built in America’ as a result of the CHIPS Act. Nucor trades on a forward p/e of 9x and yields 1.38%.


Factory-software and automation-gear supplier Rockwell Automation is also benefiting from the factory-building boom. The Milwaukee-based company reported a 26% increase in quarterly sales from a year earlier, and its operating margin rose by more than 5 percentage points to 21.3% from higher sales volumes and price increases.


Rockwell CEO Blake Moret said industrial customers are investing more in automation to counter a declining force of capable factory workers in the U.S.


Rockwell raised its profit guidance in anticipation of 13% to 17% growth in core sales this year. Mr. Moret said that as supply-chain disruptions ease and the availability of components improves, Rockwell can complete orders faster and increase its sales. Rockwell trades on a forward P/E of 25x and yields 1.58%.


CRH is keen to not miss out on what Albert Manifold CEO describes as the largest federally supported infrastructure program the US has even seen. Shareholders this week voting overwhelmingly to move their primary listing to the US is proof of this. North America currently represents 75% of group EBITDA, and the US is expected to be the key driver of future growth. The move to a US primary listing is expected to bring increased commercial, operational and acquisition opportunities for CRH.


Crucially, it levels a very competitive playing field for CRH to grow their existing business in what Manifold declares should be a golden age of infrastructure spend. CRH trades on a forward P/E of 12.6x an over 35% weighted average discount to its peers and yields 2.6%.



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The value of your investment may go down as well as up. You may get back less than you invest.