MONDAY, NOVEMBER 22, 2021
According to an analysis of the U.S. Bureau of Labor Statistics’ Producer Price Index data by the Associated Builders and Contractors, construction input prices witnessed an increase of 1.5% in October. In nonresidential construction, input prices also saw an uptick of 1.4%.
The organization reports that the latest increase is the largest monthly increase that the industry has seen since June. In comparing year-over-year numbers, construction input prices were 21.1% lower in October of last year, while nonresidential construction input prices were 22.3% lower over the same span.
In looking at specific materials, steel mill product prices have increased 141.6% since October 2020, while iron and steel prices are up 101.5%. Softwood lumber prices, which surged during the pandemic, are now down 19.5% from the same time last year.
“Any notion that the bout of pandemic-induced inflation was simply transitory has gone by the wayside,” said ABC Chief Economist Anirban Basu. “Inflation continues to endure, particularly in multiple commodity categories that directly impact the cost of delivering construction services in America. These materials price increases are simply mind-boggling, with iron and steel prices up more than 100% over the past year.
“Despite increased vaccination levels, global supply chain disruptions persist,” said Basu. “Contractors should expect elevated prices well into 2022. According to ABC’s most recent Construction Confidence Index, the average contractor expects profits to decline over the next six months as the combination of high materials prices and an ongoing shortage of workers conspires to put pressure on margins.”
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According to an analysis of the U.S. Bureau of Labor Statistics’ Producer Price Index data by the Associated Builders and Contractors, construction input prices witnessed an increase of 1.5% in October. In nonresidential construction, input prices also saw an uptick of 1.4%. |
A breakdown of product price increases, month to month, includes:
The Associated General Contractors of America reports that the increased input costs are beginning to have a trickle effect, in that the prices of construction projects are also on the rise.
“After being battered by unprecedented price increases for many materials, contractors are finally passing along more of their costs,” said Ken Simonson, the association’s Chief Economist. “Meanwhile, supply-chain bottlenecks and labor shortages continue to impede contractors’ ability to finish projects.”
In an analysis of the producer price index for new nonresidential construction—a measure of what contractors say they would charge to erect five types of nonresidential buildings—the AGC found that there was a 7.1% increase from September to October and a 12.6% increase over the past 12 months.
Over the past year, the following materials’ product price indexes increased:
Compared to the index of input prices—the prices that goods producers and service providers such as distributors and transportation firms charged for inputs for nonresidential construction—these numbers climbed even higher, reporting a 21.1% increase compared to October 2020.
“Supply chain backlogs are clearly one of the biggest threats to the economy recovery,” said Stephen E. Sandherr, the association’s Chief Executive Officer. “Washington officials need to be more aggressive in taking steps to get key materials moving again so construction firms can continue rebuilding the country.”
To observe exactly how the increased input prices are affecting “bid price” producer price indexes, the AGC released this chart.
Construction Woes
According to a construction outlook regarding the second half of 2021 and the first half of 2022, global provider of real estate and investment management services Jones Lang LaSalle (JLL) reports that costs are expected to continue increasing.
In its report, JLL forecasts that as materials and labor availability continue to constrain industry recovery, cost and labor conditions will worsen as nonresidential work volumes finally start to pick back up.
In looking at the statistics, the JLL outlook reports that the construction unemployment rate in August was 4.6%, compared to 7.6% in 2020. However, while the numbers appear to be improving, lack of available labor has affected wage growth. The inability to meet increased wages or finding crews of skilled laborers has led to more project delays in 2021 than a lack of materials, and conditions are expected to worsen over the coming year.
In 2020, nearly 85% of project delays and cancellations were caused by either owner-led decisions or government-ordered construction shutdowns. While much of the shift was to be expected, it is notable that despite all of the headlines around problems with materials, both labor and materials created nearly the exact same level of delays, at 23% and 22%, respectively.
While the industry continues to overcome these challenges, two additional issues persist to loom over the industry:
Although unemployment rates are improving and wages are escalating, next year construction labor costs are expected to see continued growth at a similar elevated rate to the last six months, with wage increases in the 3-6% range.
Production challenges across the world and bottlenecks throughout supply chains are forecasted to experience delays. However, prices for some commodities, including metals, are likely to see a relief in price.
Material costs have the lowest confidence forecast due to the wide range of inputs and global supply chains bucketed into a single category. The net impact will be a wide range of price changes for individual materials, with an average increase across all materials in the 5-11% range expected.
Nonresidential construction rebound isn’t expected to occur until the spring or summer of 2022, due to a combination of uncertainties associated with the delta variant and typically slower winter months.
Overall, the fate of these industry aspects relies heavily on the outcome of public and government spending on infrastructure. Should an infrastructure bill pass in Congress soon, much of the spending, and therefore the cost impacts, will occur in 2-6 years after passage rather than right away.
Also plagued by inflation and the effects of COVID-19, the coatings industry, too, it is witnessing a shortage and price surge. From the surge of demand by do-it-yourselfers stuck at home, to the strange freeze that took over Texas earlier this year and worsening supply chain issues, the coatings industry has been backed into a corner with no signs of when the market will improve, some experts say.
Equity analyst firm, Morgan Stanley, reports that the inflation will continue through the first half of next year then veer into deflation for the second half. In specifically refencing the coatings industry, the firm said this represents “the peak of raw material availability issues/cost inflation, but just the early stages of price achievement against it.”
The major factors that will determine how persistent the inflation is in the industry, however, are how the nation will bounce back from Hurricane Ida and the functionality of global supply chains for the chemical industry. As mentioned, the Texas freeze earlier this year also affected the chemical industry, in that much of its petroleum production—a critical ingredient in paint—was slowed.
These shortages, seen mostly in epoxies and acrylics, as well as several types of solvents and additives, are the main issues the industry is facing now, according to the firm.
Additional research conducted by the Federal Reserve on the matter found that producer prices for painting and coating manufacturing rose 10.6% in August compared to last year. The jump is the largest the market has seen since January 2009. At the same time, sales totals also witnessed a rise, climbing 7.8% annually in June to $1.34 billion.
Tagged categories: Associated Builders and Contractors Inc. (ABC); Associated General Contractors (AGC); Building materials; Business conditions; Business matters; Coating Materials - Commercial; Coatings; Construction; Market; Market data; Market forecasts; Market trends; Program/Project Management; Residential Construction
