While capital investment in the distribution sector has been expanding since last fall, equipment purchases including materials handling will begin to rise significantly in manufacturing later this summer. Once this cycle gets underway, expect two to three years of above average growth.

The 8.3% February-March surge in industrial machinery orders assures a sustained boost in equipment shipments ahead. This will happen even though U.S. manufacturing is still in shock from the loss of world market share caused by the dollar appreciation in the late 1990's, and the emergence of low-cost Chinese manufacturing. Furthermore, factory capacity utilization is lower now than at the beginning of previous recoveries.

Since last September, overall materials handling equipment shipments were 7% higher—about $90 million a month—than the previous year's numbers. The added equipment purchases have been largely for distribution operations rather than for manufacturing. In addition, demand for materials handling equipment in distribution is being driven by replacements rather than expansions, which will be mirrored in manufacturing.

This resurgence of buying activity is consistent with recent growth trends in the two sectors. Distribution activity jumped sharply when the economic recovery restarted last May. The "goods" portion of Gross Domestic Product has risen at more than a 7% annual pace since then.

However, manufacturing production, excluding electronics, has lagged. It did not begin to expand until February of this year when manufacturing output rose 0.9%, a 12% annual pace. Then in March, while production was unchanged, all other measures of manufacturing activity soared. Manufacturing continued to expand in April.

At the same time, manufacturers boosted their inventory slightly but not as much as they wanted. In fact, the inventory/sales ratio fell sharply to a record low level as demand moved ahead at an even faster pace than anticipated. Most manufacturers are now increasing inventories.

Equipment purchases in the manufacturing sector will initially be replacement with investments that require facility changes lagging 1–2 quarters.