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By Peter G. Hall
Vice-President and Chief Economist Export Development Canada

Here's a crisis for you. I know, we’ve all had enough crises over the past 7 years to last a lifetime. But this is a crisis of a different sort. Growth has taken America by surprise, firing up idled equipment, gobbling up vacated floor space and creating a capacity crunch. Long-buried expansion plans have been resurrected, and it looks like a boom is in the works. Is this just isolated to some segment or region of the US economy, or is it a more generalized, pan-economy movement?

Cynics can be forgiven for a bit of disbelief. From peak levels in 2008, private non-residential construction plunged 34 per cent by early 2010 – and that wasn’t yet the lowest point. Growth resumed in 2011, but fizzled by the end of 2012. It has been a long climb, and even with recent growth, investment in structures is still only 85 per cent of those 2008 peak levels. It is a segment of the economy that has perhaps endured the greatest battering, and one would expect to see at best a tentative rebound.

What changes the picture is the industrial capacity story. All-industry capacity utilization is within a percentage point of previous peak levels, practically bridging the 14-percentage-point chasm that opened up in 2009. Isolate the manufacturing sector, and things get even tighter: capacity is at previous peak levels. What’s interesting about this is that back then, the world was at a frenzied pace of activity. This time around, things are just getting going globally, and US production is already out of room. It’s true for most sub-sectors of manufacturing, but there are some sectors that are particularly hot. Textiles, apparel and the food industry are all above previous peak capacity levels. According to the numbers, the auto sector is bursting at the seams, at 106.5 per cent of previous peak capacity. That’s tight.

Commercial real estate prices are reflecting this. Latest numbers show year-on-year increases of over 8 per cent. Look at the latest numbers, and annualized growth is more like 10 per cent. The Green Street Advisors’ commercial property price index shows both record-setting price levels and a recent acceleration of price growth, a clear indication of a red-hot market.

So, are reticent firms loosening the purse strings? It seems so. Construction put in place is rising at a torrid pace. General office space is currently being added at a 15 per cent annual pace. It has a near rival in the commercial space segment, up 14 per cent year-on-year, with automotive space rising by almost 40 per cent compared with this time last year. Construction of manufacturing facilities is up steadily by over 20 per cent, and the closely-related land transportation segment is not far behind. Not all industry sectors are investing at the same pace, but they could be in short order. Construction activity usually lags growth by a couple of years, and some segments are likely trying to catch up. It’s possible that they are running into a lack of building capacity, not a surprise following the long hibernation.

Add to that growth in public sector activity, and the pressure intensifies. Federal office construction is also up sharply, but that’s just a start. Highway and street activity has doubled in the past year, sewage and waste disposal construction is up by roughly 75 per cent and construction of conservation facilities is up by approximately 30 per cent. Unlike the immediate post-crisis period when growth was fed by stimulus programs, this activity appears to be more needs-based.

It’s all very impressive, and it’s occurring on a wide enough front that it looks entrenched. It’s a good-news story, but it comes with a couple of warnings. Construction is a particularly domestic industry, making it especially vulnerable to local constraints. Post-crisis protectionism made it even moreso. Combine that with ultra-loose monetary policy, and this chunk of the economy could be facing much greater price pressure, soon.

The bottom line? America’s industrial capacity crunch could be exacerbated in the short-run by a capacity crunch in the capacity-creating construction sector. Sounds like a recipe for an inflation runup – and an opportunity for savvy cross-border construction companies with ready-made solutions.

© EDC

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