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ABC Releases Construction Input Price Report

Tuesday, September 7, 2021

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In taking an analysis of data released by the U.S. Bureau of Labor Statistics’ Producer Price Index, the Associated Builders and Contractors found that construction input prices rose 0.6% in July, while nonresidential construction input prices increased 0.8% for the month.

When comparing year-over-year prices, ABC reported that construction input prices were 23.1% higher, while nonresidential construction input prices increased 23.4% over the same timeline.

“One’s definition of transitory needs to evolve with these data,” said ABC Chief Economist Anirban Basu. “While it is quite likely that there will be less inflation a year from now, a rebounding economy, ongoing supply chain disruptions and limited productive capacity have conspired to generate rapid price increases. Many economists insist that the current situation is merely temporary; still, today’s input price increases can meaningfully affect contractor fortunes by trimming margins and delaying the onset of projects.”

Janifest / Getty Images

In taking an analysis of data released by the U.S. Bureau of Labor Statistics’ Producer Price Index, the Associated Builders and Contractors found that construction input prices rose 0.6% in July, while nonresidential construction input prices increased 0.8% for the month.

Additionally, energy prices are reportedly continuing to experience substantial year-over-year price increases. The price of natural gas is up 146.7%, while crude petroleum and unprocessed energy materials prices are up 102.9% and 93.8%, respectively. Prices for steel mill products increased 10.8% for the month and are up 108.6% for the year.

Information released on the full producer price index is as follows (percentages are listed as one month and 12-month changes, respectfully):

  • Plumbing fixtures and fittings: 0.3% and 3.5%;
  • Fabricated Structural Metal Products: 2.9% and 28.8%;
  • Iron and Steel: 7.8% and 89.2%;
  • Steel Mill Products: 10.8% and 108.6%;
  • Nonferrous Wire and Cable: 0.2% and 31.5%;
  • Softwood Lumber: -29% and 45%;
  • Concrete Products: 0.3% and 4.5%;
  • Prepared Asphalt, Tar Roofing & Siding Products: 1.3% and 10.9%;
  • Crude Petroleum: 3% and 102.9%;
  • Natural Gas: 13.5% and 146.7%; and
  • Unprocessed Energy Materials: 6.5% and 93.8%.

“The good and bad news is that the economy is flush with liquidity,” said Basu. “Injections of money supply by the Federal Reserve, which has yet to indicate when it will begin to moderate its quantitative easing program, have helped create large pools of investable money. A significant fraction of that money is being invested in real estate, which often translates into construction projects. That is consistent with the stable-to-rising backlog observed in recent months, as well as ongoing confidence among contractors, reflected in ABC’s Construction Backlog Indicator and Construction Confidence Index. However, that liquidity also serves to help push prices higher.

“One can only conclude that the economy will continue to run hot into 2022 despite the malign impacts of the delta variant, producing both hefty advances in gross domestic product and unusually elevated inflation,” Basu continued “The fact that steel prices are rising is not only an indication of the recovery transpiring in goods-producing industries like construction and manufacturing, but also of the difficulty global suppliers are having keeping up with demand. That dynamic does not appear poised to change substantially in the very near-term, though there was some evidence of moderating inflation in the most recent Consumer Price Index report. Contractors should assiduously build contingencies into their contracts to protect themselves from additional materials price spikes. Given that construction firm services are in high demand, contractors should have enough negotiating leverage to accomplish that under most circumstances.”

Recent Construction Reports

With regards to construction input prices earlier this year, the ABC reported in May that it had increased 4.6% compared to the previous month. Construction input prices were 24.3% higher than a year ago, while nonresidential construction input  also increased 23.9% over that span.

To quantify further, all three energy subcategories registered significant year-over-year price increases. Crude petroleum rose 187%, while the prices of unprocessed energy materials and natural gas increased 100% and 90%, respectively. The price of softwood lumber expanded 154% over the past year.

A breakdown of product price increases, month to month, includes:

  • Plumbing fixtures and fittings, 0.1%;
  • Fabricated structural metal products, 5%;
  • Iron and steel, 2.6%;
  • Steel mill products, 2.4%;
  • Nonferrous wire and cable, 4.2%;
  • Softwood lumber, 20.6%;
  • Concrete products, 0.6%;
  • Prepares asphalt, tar roofing and siding products, 3.5%;
  • Crude petroleum, 12.8%;
  • Natural gas, 9.5%; and
  • Unprocessed energy materials, 9.6%.

“The specter of elevated construction input prices will not end anytime soon,” said Basu at the time. “While global supply chains should become more orderly over time as the pandemic fades into memory, global demand for inputs will be overwhelming as the global economy comes back to life. Domestically, contractors expect sales to rise over the next six months, as indicated by ABC’s Construction Confidence Index. This means that project owners who delayed the onset of construction for a few months in order to secure lower bids may come to regret that decision.

Basu also noted, though, that most of this was temporary. Suppliers will eventually boost capacity, bolstering output, which will shift prices back down.

“Still, there are some things that have changed during the pandemic and will not shift back,” said Basu. “For instance, money supply around the world has expanded significantly. Governments have been running large deficits. This means that some of the inflationary pressure that contractors and others are experiencing may not be temporary, and that inflation and interest rates may not be as low during the decade ahead as they were during the decade leading up to the pandemic.”

In July, a new quarterly National Construction Cost Index report from construction consultancy firm Rider Levett Bucknall revealed that the NCCI was up 4.6%. in the first quarter of 2021 compared to that same period last year.

The report overall sheds a positive light on the industry despite the ongoing concerns of material costs, supply chain issues and skilled employment lags, according to the firm’s Julian Anderson, President, North America.

In addition to the NCCI, the report also highlights several other metrics, including the Architectural Billings Index, which from April 2020 to April 2021, has gone up from 30.2 to 57.9. The Midwest and the South regions are reportedly seeing the greatest uptick reporting 60.6 and 58.3, respectively, with the Northeast coming in at 55.0 and the West at 52.4.

The report also tracked the Dodge Data & Analytics Momentum Index (DMI), which is a monthly measure of the first report for non-residential building projects in planning.  As the DMI increased, the NCCI also increased, indicating that demand continues to drive cost increases as the industry deals with supply struggles.

This quarter, the NCCI increased from 211.9 to 218.06 (2.9%), which is the largest increase in a quarter in the last 20 years, according to Bucknall.

In addition to the numbers, though Anderson points out that there are other factors impacting the industry such as climbing interest rates on top of the construction cost hikes that offer a challenge for budgeting, another is the prioritization of clean energy from the current administration.

In terms of metro areas, Boston, Chicago, New York, Phoenix, Portland and Washington, D.C. all experienced percentage increases in construction costs above the 4.35% quarterly national average during Q1 2021 versus the same quarter a year ago.

   

Tagged categories: Associated Builders and Contractors; Associated Builders and Contractors Inc. (ABC); Commercial Construction; Construction; Economy; Good Technical Practice; Government; Market; Market data; NA; North America; Projects - Commercial

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