Construction growth signals good news for the plastics industry

The monthly report on total U.S. construction spending released by the Census Bureau recently showed a sharp increase.

According to the latest report, the amount of money spent on the construction of manufacturing facilities spiked up by 22 percent in January when compared with the same month from last year to a total of nearly $5 billion for the month. By comparison, the January increase in combined spending for all types of nonresidential construction projects was a moderate 4 percent.

To add some further context to this January spike in spending for manufacturing, these types of projects accounted for more than 11 percent of the monthly total for all nonresidential construction spending. There were only two types of nonresidential construction with greater spending in the latest month: projects related to the generation and distribution of power; and educational facilities. There was more spent for manufacturing construction in January than for commercial space, office space, or highways and streets.

I have been reading these data reports long enough to know that one month does not a trend make. There can be unusual, one-time reasons for a one-month spike in data such as this. These data are also subject to subsequent revisions; therefore, it is possible that the good news will be revised away in the coming months.

Now I have no trouble admitting that I would like the robust growth in construction spending for manufacturing facilities to continue for a long time to come. So I went back to the historical data to check the recent trend in this particular data series. A strong monthly performance such as this one is much more likely to persist into the future if it is supported by a strong trend in the recent past.

As it turns out, the total amount spent on the construction of manufacturing facilities in 2014 was more than $55 billion. This represented a jump of more than 15 percent from the total spent in 2013. Last year, money spent on manufacturing construction projects accounted for just over 9 percent of total nonresidential construction spending.

This is a salubrious trend indeed, especially in light of the fact that the combined total spent for all nonresidential projects in 2014 escalated by just 6.6 percent when compared with the total from 2013. So the recent trend in spending for manufacturing facilities is strong, and the January data suggest this trend may even be gaining momentum. My latest forecast calls for an annual gain of at least another 15 percent in 2015. This would push the spending total to about $65 billion for the year, and it would make the manufacturing category the fourth largest in terms of total dollars spent behind power, highways and streets and education.

In my opinion, that's right about where it belongs.

All of this affects plastics processors and machinery suppliers on a number of levels. The most obvious is that the nonresidential construction sector is a large end-market for plastic building materials. We tend to think of the residential side as being the primary market for profiles, pipe and tubing, but the increased activity from the construction of new factories will also generate demand for film and sheet, pipe, and other plastics products.

Another way that increased construction spending helps the plastics industry is that it is good for the overall economy. Construction of new factories is a labor-intensive activity, so a rise in construction spending creates a significant number of jobs. Every dollar spent on new construction projects like these will eventually generate $3 to $4 worth of overall economic activity.

Construction jobs are high-paying, so they raise household wages and incomes. Higher wages means more money spent in the large end-markets for plastics products such as automotive, consumer products and packaging. Construction activity generates demand from small businesses for new trucks and other types of tools and equipment that are all made with plastics parts. And once a new factory is built, it has to be equipped with new machinery, furnishings and modes for transportation. All of this activity drives growth in aggregate demand, and that is good for the plastics industry.

For those of you who are already tapped into the nonresidential construction markets, the manufacturing sector is not the only one that is in the midst of a stronger-than-average trend upward. The large categories (in terms of total dollars spent) of spending on buildings for lodging, offices and commercial use have also posted very strong growth rates in recent months. And the fastest growth rate in the entire nonresidential spectrum has been in the relatively small category of conservation and development. Based on recent trends, the growth rates in spending for all of these categories should remain elevated through 2015.

Unfortunately, there are also a couple of large categories and a couple of small categories that have suffered downward trends in construction spending in recent months. The larger categories are spending for communications projects and spending for health care facilities. The smaller categories are public safety projects and religious buildings. Water supply projects, a category that is dear to the hearts of manufacturers of plastic pipe, experienced a 4 percent decline in spending last year, but this category registered a small increase in January.

Perhaps the most exciting trend that is emerging in this construction spending data is that U.S. manufacturing is once again on the rise. All of the historical data clearly indicate that the plastics industry thrives when the U.S. manufacturing sector is growing at a healthy rate. The entire U.S. economy also thrives when the manufacturing sector is growing at a healthy rate.

This country's economy started out as primarily agrarian-based, but we very quickly developed into an economy based on making things and building things. This is how we grew the biggest, most powerful economy and country in the world.

And to think there may actually be a few of you who probably never dreamed that you could get really excited by reading a monthly data release from the government.