Industrial productivity and capacity move ahead

By DARYL DELANO, Delano Data Insights -- Modern Materials Handling, 5/1/2000

Corporate America has invested a substantial amount of money during the past decade in new manufacturing, warehouse, and distribution facilities. This has been a very positive trend for the nation's materials handling equipment sector, since much of this new building, renovation, and retrofit activity has created additional demand for conveyors, industrial trucks, automatic data capture technology, and software. Over the past several years, in fact, it's been these investments in new equipment-not investments in new buildings-that have dominated business capital spending growth.

These well-placed and intelligently planned investments have in turn helped both the manufacturing and non-manufacturing sectors of our economy work more efficiently. Productivity in U.S. industrial firms rose at an estimated rate of 5% during 1997, followed by 4.8% growth in 1998, and manufacturing productivity increased at an even stronger 6.4% rate during 1999.

What's more, industrial sector productivity skyrocketed by a 10.3% annualized rate over the final three months of last year-the best quarterly increase in manufacturing productivity recorded since the second quarter of 1982. There's no doubt that investment in inventory control systems, bar coding systems, sorting conveyors, and a whole host of other materials handling products and services has played a major role in the sharp improvement in productivity trends in the 1990s.

Overall production capacity in the nation's manufacturing sector expanded by 4.3% between February 1999 and February 2000. Construction spending trend information makes it clear that most of this additional capacity is a product of recent high levels of investment in new equipment, not the result of "greenfield" construction of new manufacturing space.

The total number of dollars being spent annually on the construction of new manufacturing plants and industrial warehouses hasn't increased at all in recent years. Even before adjusting for inflation, the Commerce Department estimates that total industrial construction activity declined by 4% in 1997 after increasing by a scant 0.5% the year before. Industrial construction spending did bounce back a bit during 1998 with a 2.9% gain - but then plunged by 17.4% last year.

Spending in this building sector has now fallen below its total from a year earlier in 10 of the last 16 calendar quarters. With foreign economies growing more rapidly now, and with export demand strengthening, the tide is about to turn. But we're still not likely to see a tidal wave of new industrial construction either this year or next.

Nevertheless, spending for the new distribution and warehouse centers that are needed to serve the exponential growth in e-commerce will provide significant impetus to the kind of new construction that is particularly conducive to the sale of materials handling equipment and supplies. All-in-all, the fundamentals point towards trends in manufacturing and non-manufacturing activity during the next couple of years that will contribute to generally healthy market conditions for manufacturers and distributors serving the materials handling industry.