Manufacturing production has expanded at a 5.6% annual pace since last May with growth expected to accelerate to well over 6% later this year and through 2005. In fact, output will return by this summer to the peak production level at the top of the last business cycle in mid-2000.

In addition, total factory output will increase 4.9% this year, the first rise since 2000. This is well above the 3.3% growth trend for the last two decades, but below every year in the long 1994–99 business expansion.

While consumer and investment demand growth in the next few years may match the high growth of the late 1990s, domestic manufacturers will not get all of the orders as business continues to shift to lower cost Asian factories. Production will expand 6.1% in 2005 with an above average gain likely again in 2006.

The recovery is broad based too. For the first time in three years, non high-tech manufacturers are increasing production. On an operating level basis, they regained nearly 30% of the 8.4% recession plunge in output by the end of 2003. That said, production for the year increased just 1.6% in the non high-tech sector. Looking ahead, the trend will continue and these manufacturers are expected to fully recover to the early 2000 operating level by next winter.

Meanwhile, high-tech output rose 24.5% in 2003. In fact, the relatively small high-tech sector accounted for all of the capacity expansion in U.S. manufacturing last year.

The largest production gains this year are expected in electronic components, industrial machinery, auto parts, furniture and appliances. Each of these industries should have double-digit sales increases. Also, expect above average increases in computer, telecom equipment, building materials, paper and drugs. Below average growth is anticipated for motor vehicles, printing and publishing, food, medical supplies, farm products, cement, metals and chemicals.

High-tech manufacturers have substantial surplus capacity and are not expected to add significantly to their U.S. facilities except for process improvements in existing semiconductor fabrication lines. Other manufacturers are now operating at about 75% capacity utilization. There are very few expansion projects underway.

Capacity utilization will rise very quickly, perhaps reaching 80% within a year. This means substantial capacity addition will be made in 2005–06, including the associated materials handling equipment.