Materials handling activity has increased enough with the expanding economy that the equipment and facility capacity to handle, move and store both supplies and products is being strained at many manufacturing and distribution sites. This is setting off a new round of expanding investment in materials handling equipment, which will persist for at least two years, according to research by Jim Haughey, director of economics for Reed Business Information in Newton, Mass.

Though most of the added investment spending will be for conveyor systems, lift trucks and warehouse space, the accompanying spending on MRO items for large systems, as well as related small storage, dock, packaging and product movement equipment, will provide a sales boost to industrial distributors, Haughey said.

Materials handling equipment orders in the monthly Census Bureau survey were 26 percent higher in May 2004 than May 2003, and shipments from U.S. manufacturers were 15 percent higher. Equipment shipments will rise 10.7 percent in 2004 and a further 8.2 percent in 2005, with continued growth well into 2006. The survey and the forecast includes only conveyors, lift trucks, hoists and cranes, but they also indicate the increase in investment activity for related materials handling equipment.

For the most part, the rise in equipment purchases over the last year has been to replace or upgrade equipment within existing manufacturing and distribution space. Construction spending for warehouses and manufacturing has been steady for the last six months after a three-year plunge, but is now at a level that suggests small declines in total manufacturing space and very small expansion in warehouse space. These construction trends are expected to change quickly. Warehouse construction spending is expected to rise at a 12 percent annual pace in the second half of 2004 and nearly 30 percent next year.

Construction spending on manufacturing facilities jumped 4.5 percent in May. That appears to be the first step in a two- to three-year expansion that will initially proceed at a 25 percent annual pace.

Equipment will be bought over the next two years to catch up on postponed purchases in 2000–03, and to handle the expected 10 percent to 11 percent rise in the flow of "goods" through the economy in 2004–05, Haughey said.

In addition, distributors should expect a substantial share of the equipment investment to be driven by the need to upgrade or replace equipment to move and store goods more efficiently. That's because the ratio of inventory to sales in both manufacturing and distribution is declining more quickly than it has during the last decade. Manufacturers now hold inventory equal to 1.23 months of sales. That will decline to less than 1.2 by the end of next year. Similarly, the ratio for distributors will fall from the current 1.12 to about 1.08. Operating with leaner inventories will require more and smarter equipment and better attention to equipment maintenance.