Manufacturing construction activity has grown to unprecedented levels for just over three years now, in part thanks to large doses of government subsidies and political goals that favor domestic expansion in the industry. This growth is much more concentrated on the input side of the equation. The output side, or what manufacturers are producing, has seen more challenging times recently. Readings from the Institute of Supply Management’s Purchasing Managers’ Index (PMI) have hovered below 50 (and therefore considered contractionary) for the last 25 out of 26 months¹. Higher interest rates and softening demand are the two main culprits behind the slump.

Many forecasts for the next few years will compare to an unusually high period, making it seem like the market is struggling. However, this doesn’t reflect a failure. It’s just a return to more sustainable growth after a peak. The growth in factories isn’t a sign of over-building, but rather adding capacity to an industry that remains healthy but is slowing down from its peak.

Does all that construction activity lead to crashing capacity utilization? A few factors are at play. Most of the construction activity is concentrated in a high-tech sliver of the manufacturing sector: semiconductors, an area that requires increased production capacity. Additionally, expected lower interest rates could boost factory output in other parts of the industry. Big-ticket items usually accompanied by a loan — cars, trucks, tractors, cranes, industrial machinery, and capital equipment — will become more attractive as financing costs decline. The supply-chain meltdowns of 2021 and 2022 led to excessive inventory buildup, but this headwind to new orders and production is now easing. The ongoing factory-production boom could provide a long-term boost as manufacturing picks up. In fact, there are already signs of improvement within the manufacturing sector. The latest PMI reading shows the production portion has expanded for the first time in months, with new demand also trending positively. Additionally, industrial production has seen two consecutive quarters of period-over-period growth. While uncertainty remains for the manufacturing sector in 2025, the recent construction blitz has provided a strong foundation for future growth.