Summary

Construction input prices surged to 2.6 percent in May, according to the June 17 report of the producer price index (PPI) by the Bureau of Labor Statistics. Over the 12 month period from May 2007 to May 2008, the aggregate price of inputs to construction industries increased 8.4 percent. Prices for fabricated structural metal products continued to grow at 2.9 percent in May, slowing since a 3.1 percent increase the prior month. Softwood lumber witnessed a rapid increase in May of 7.1 percent compared to just 1.3 percent in April. Price indices for plumbing fixtures and brass fittings continued to grow at a much slower pace at 0.2 percent. In addition to these increases, prices for nonferrous wire and cable increased by 2.2 percent after declining 3.1 percent in April. Also, prices for asphalt felts/coatings increased by 5.6 percent in May following a much smaller 0.8 percent increase the previous month. Additionally, prices for fabricated ferrous wire products continued their decelerated growth in May as they have grown less than one percent in May.

Overall, producer price index data reflects recent increases in energy prices. The index for crude energy materials advanced a staggering 13.1 percent in May after registering a 4.1 percent gain the previous month. Natural gas prices in May saw a 17 percent jump after an increase of 4.3 percent in April. Between May 2007 and May 2008, crude energy materials prices are up 67 percent. Intermediate energy goods are up 29.4 percent over that period, while finished energy goods prices were up 19.7 percent.

What This Means

According to Associated Builders and Contractors, today’s data indicates that 2008 construction inflation has yet to mirror the impressive increases experienced in the nonresidential construction market that it did during inflation’s recent peak in 2004-2005. Many analysts have chosen to put a positive spin on today’s PPI release, noting that core producer price components remain well behaved and that much of the increase in prices was associated with volatile non-core elements, such as energy and food. For nonresidential contractors, this only offers small comfort since industry players are so heavily susceptible to increases in the price of non-core components, especially energy. Due to economic factors such as global supply and demand combined with global investor’s ongoing preoccupation with commodities, nonresidential contractors will likely experience sharp increases in construction input prices, including energy prices, through the balance of the summer.

In a flowing economic environment characterized by ongoing credit issues, this makes economic life difficult since contractors must request higher producer price costs in bids submitted to developers. These developers must, in turn, supply cost information to wary lenders who are not necessarily inclined toward commercial construction lending at this time. In short, the recent increases in construction input prices will likely dampen commercial construction starts even more than what would have been the case in the face of a soft economy. However, nonresidential contractors will likely see some relief in the form of greater labor availability and moderation in labor cost increases.