Why U.S. Factory Construction is at Its Highest Levels in Decades

Key Takeaways

• Factory building in the U.S. is at its highest point in over 50 years, according to a new report from Moody’s Analytics.
• A boom in demand for semiconductors and billions in investments from the federal government are a pair of motivating factors.
• Moody’s economist Ed Friedman said geopolitical developments and demand for semiconductors going forward will determine whether the pace of construction slows in the coming years.

Construction of factories has hit the highest level in more than 50 years thanks to booming demand for semiconductors and billions of dollars in investments from the federal government.

While construction could slow once the funds allocated by the CHIPS and Science Act of 2022 have been distributed, Moody’s Analytics economist Ed Friedman wrote Thursday that semiconductor demand and geopolitical tensions would determine whether additional government funding sustained the construction boom.

U.S. Wants to Become Dominant Semiconductor Maker

After supply chain disruptions caused by the pandemic revealed the degree to which the U.S. depended on foreign countries for semiconductors, legislation was passed to increase domestic production.

Since late 2023, more than a dozen companies have reached agreements with the federal government and received over $30 billion in grants to build or expand facilities across the U.S. The agreements have been made with domestic companies like Intel (INTC), Texas Instruments (TXN), and Micron (MU), along with international heavyweights like Taiwan Semiconductor Manufacturing Company (TSM) and Samsung.

The grants awarded to international companies like TSMC could prove especially important, Friedman wrote, because of the massive scale of the company’s market, which includes customers like Apple (AAPL) and Nvidia (NVDA).

Once TSMC completes its planned $65 billion project in Arizona, for which it has received $6.6 billion in incentives, the facility will help fulfill demand from its U.S. customers. That could be vital if China takes more aggressive action against the company’s home country of Taiwan in the coming years, Friedman said.

If China does escalate tensions with Taiwan, or semiconductor demand increases, more federal funding could follow, while construction will likely slow if that funding doesn’t come, according to Moody’s.

Overall, the push to increase domestic semiconductor production and reduce reliance on foreign suppliers has led to a surge in factory construction in the U.S. The federal government’s investments and grants have incentivized both domestic and international companies to expand their operations in the country.

The Impact of Semiconductor Demand

The demand for semiconductors has been a major driving force behind the increase in factory construction. Semiconductors are essential components in various industries, including technology, automotive, and healthcare. The COVID-19 pandemic highlighted the vulnerabilities in global supply chains, particularly in the semiconductor industry.

As the U.S. aims to become a dominant semiconductor maker, the need for increased production capacity has become evident. The federal government’s investments and grants have provided the necessary financial support for companies to build or expand their semiconductor manufacturing facilities.

Furthermore, the grants awarded to international companies like TSMC demonstrate the importance of securing a diverse and reliable supply chain. By encouraging international companies to establish manufacturing facilities in the U.S., the country can reduce its dependence on a single region or country for semiconductor production.

Geopolitical Tensions and Future Construction

Geopolitical tensions, particularly between China and Taiwan, play a significant role in determining the future of factory construction in the U.S. If tensions escalate or if China takes aggressive action against Taiwan, the U.S. could face disruptions in semiconductor supply chains.

In such a scenario, the U.S. government may provide additional funding to support the expansion of domestic semiconductor manufacturing facilities. This would ensure a stable supply of semiconductors for various industries and reduce the risk of supply chain disruptions.

However, if geopolitical tensions ease or semiconductor demand stabilizes, the pace of factory construction may slow down. The construction boom is currently sustained by the combination of high demand and government funding. Without these factors, the industry may experience a slowdown in construction activity.

Conclusion

The construction of factories in the U.S. has reached its highest levels in over 50 years, driven by booming demand for semiconductors and significant investments from the federal government. The push to increase domestic semiconductor production and reduce reliance on foreign suppliers has incentivized companies to build or expand their manufacturing facilities in the country.

The future of factory construction in the U.S. will depend on various factors, including semiconductor demand and geopolitical tensions. If demand remains high or tensions escalate, the government may provide additional funding to support the expansion of domestic manufacturing facilities. However, if demand stabilizes or tensions ease, the pace of construction may slow down.

Overall, the surge in factory construction reflects the importance of a robust and resilient domestic manufacturing sector, particularly in critical industries like semiconductors. By increasing domestic production capacity, the U.S. aims to secure its supply chains and maintain its competitiveness in the global market.

Read the original article on Investopedia.