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Non-residential construction typically drops off after interest rates rise, with a lag of one to two years. But we are two years past the jump in interest rates in the United States, and non-residential construction has not dropped. It has leveled off but shows no sign of a dive. Chip fabs, propelled by government subsidies, and data centers, especially those housing artificial intelligence activities, have propped up the sector. When interest rates fall, other construction will likely be crowded out by continued strength of the fabs and data centers.
The story is one of great stimulus from both government policy and private sector entrepreneurship. Our data sources don’t give us the whole story but do allow us to piece together the trends.
On the manufacturing side, computers and related electronic components used to be a trivial part of total private nonresidential construction, as the chart above shows. But the share has soared from under two percent to over 18% – and still rising. The CHIPS and Science Act of 2022 authorized $39 billion of subsidies for semiconductor manufacturing plus a 25% tax credit for equipment, plus more money for workforce training and research. Even the non-construction funds encourage more construction.
In addition, data centers for cloud storage and artificial intelligence are booming. They are included in the office category in the government’s statistical releases. Although office vacancy nationally has nearly hit 20%, office construction has increased over the last 12 months. Aside from a few unusual markets, America does not need to build any more space for office workers, but we do need more space for AI processing and cloud storage. Last year’s spending on data centers came to an estimated $25 billion, about 29% of total office construction spending.
Absent the strong trends in these two sectors, nonresidential construction would have plummeted.
Looking forward, the government stimulus money will be spent over more years, probably many more years. The U.S. stimulus comes at a time when other countries also have provided stimulus, including mainland China, the European Union, Korea, Japan and Taiwan, according to a study by BCG and the Semiconductor Industry Association. The global competition for talent and specialized resources will limit any one country’s ability to ramp up production quickly. This is good news for the construction sector, as it means the stimulus will be spread out over many years rather than concentrated in a short time period.
States with announced CHIPS Act projects
On the downside, U.S. projects will be concentrated in a relatively small number of communities. Contrast chip fabs and data centers with convenience stores and apartment buildings, which are built in every community in the country. Thirteen states have CHIPS projects that have been announced. Some states have multiple projects, and several are located in a relatively small region, such as upstate New York, New Hampshire and Vermont
Construction concentrated in one area will strain local resources. The Boise metropolitan area, for example, will have a new Micron Technology fab built at the same time that Meta (Facebook) (META, META:CA) will construct a large data center. One local observer said that both projects together will require 1,200 electricians at their peak, but the state of Idaho has only 2,000 licensed electricians. Chip fabs and data centers will crowd out other construction in their communities. Imagine someone planning to build a new store or warehouse or factory. The contractor will submit a bid that is high on cost and long on time to build, knowing how hard it will be to find all of the construction trades workers. Renting cranes, scaffolding and other equipment will also be difficult in these markets.
We economists have recognized the potential for technology improvements to stimulate new investments, provoking a boom. We have also looked at how government stimulus can direct resources to one activity, at the expense of other forms of commerce. We are getting both of these effects, in large magnitude, at the same time. Those in the private sector can enjoy the experience by selling to contractors. Those who have competing interests, though, would best get out of the way.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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