Construction Input Prices Increase in March

MONDAY, APRIL 18, 2022


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 rose 2.9% in March. In nonresidential construction, input prices also witnessed an increase of 2.8%.

Despite these findings, in a press release issued the day before, ABC reported that the construction backlog indicator increased to 8.3, according to a member survey conducted March 22 to April 5. Contractor confidence, however, is down.

Input Prices and Ongoing Concerns

Just as reported in March, construction input prices remain 24.4% higher from a year ago, but are up 39.1% from February 2020—the month before the COVID-19 pandemic began to affect the economy. Nonresidential input prices are reported to be 25.0% and 39.2% higher, respectively.

According to an analysis of the data by the Associated General Contractors of America’s Chief Economist, Ken Simonson, March was the eighteenth-straight month in which the cost index rose more than the bid-price index on a year-over-year basis.

At the beginning of 2022, the AGC found that increased prices of construction materials were outpacing the rate at which contractors are raising their bid prices. In a survey issued by the association in January, 86% of contractors rated material costs at their top concern for 2022, more than any other concern. Availability of materials and supply chain disruptions were the second most frequent concern, listed by 77% of the more than 1,000 respondents.

“Construction firms have been burdened with cost increases of 20% per year or more since early 2021,” said Simonson. “Since contractors can seldom pass along increases on projects that are underway, these extreme price hikes threaten the viability of many firms. Unfortunately, the continuing war in Ukraine is likely to keep input costs elevated for many more months, if not longer.”

In the AGC report, the association noted that prices rose faster than the 17% increase in bid prices for a wide range of inputs in the cost index. According to the latest PPI report, year-over-year steel mill product prices rose 42.9%, aluminum mill shapes jumped 43.7% and plastic construction products increased by 35.2%.

Other products breaching the 17% bid increase threshold included diesel fuel (63.8%), truck transportation of freight (24.5%), asphalt and tar roofing and siding products (22.6%), lumber and plywood (20.9%), gypsum products (20.8%), architectural coatings (20.6%) and insulation materials (17.4%).

“Consumers are right to complain about inflation, which has been north of 8% during the past year,” said ABC Chief Economist Anirban Basu. “But America’s contractors have experienced materials price inflation nearly three times that during the same period. For now, there are few signs of relief.”

In specifying the monthly increase in March on several products, Basu noted on the ongoing upward price momentum, which included softwood lumber (7.6%), iron and steel (1.4%), key roofing materials (1.6%), and nonferrous wire and cable (4.4%).

“For contractors, this is not where the inflation narrative ends,” said Basu. “Despite recent growth in the nation’s labor force participation rate, contractors continue to contend with shortages of skilled construction workers. Supply chain setbacks related to the spread of another omicron variant along with the Russia-Ukraine war will also affect equipment availability. The latest ABC Construction Confidence Index survey indicates that approximately 3 in 4 contractors have suffered an interruption in delivering construction services in recent months. These challenges will persist.

“There is one more significant consideration for contractors. With inflation running hot, the Federal Reserve will have to work even harder to slow the economy to trim price pressures and expectations. Recession risks are accordingly rising, and while that is unlikely to affect the level of contractor activity in the near term, that could eventually set the stage for a period when demand for construction services declines.”

The report went on to mention that input prices for natural gas decreased and unprocessed energy materials decreased for the month, lowering by 30.1% and 11.2%, respectively. Crude petroleum prices increased 7.2%. In looking at the three energy subcategories on a year-over-year basis, those percentages are up 62.9%, 58.7% and 62.2%, respectively.

As a result of the continued uptick in prices and inflation, the AGC has urged President Joe Biden to remove the tariffs on several building materials. Currently, tariffs run as high as 25% on steel, 18% on Canadian lumber and 10% on aluminum.

Last month, the nation and the United Kingdom issued a joint press release announcing a deal to partially lift tariffs on steel and aluminum exports from the U.K. According to the joint statement, the U.K. will be permitted to export 500,000 metric tons of finished steel and 900,000 metric tons of aluminum into the U.S. duty-free before tariffs take effect.

In exchange, the U.K. has agreed to lift approximately $500 million worth of tariffs on U.S. products, such as whiskey, blue jeans and motorcycles.

In February, The White House announced a new deal between the U.S. and Japan to roll back tariffs on Japanese steel. The deal reportedly removed the 25% levy previously imposed by former President Trump from about 1.25 million metric tons of Japanese steel imports annually.

Should Japan go over that amount, however, the tariff would be reinstated on any additional steel imports. According to the U.S. Commerce Department, Japan is one of the top 10 sources of steel to the nation, but only accounts for roughly 4% of all steel imports.

And, at the end of November 2021, the U.S. Department of Commerce increased tariffs on antidumping and countervailing duties on Canadian softwood lumber imports. Implemented by the Biden Administration, the increase nearly doubles the import rate from 8.99% during the Trump Administration to 17.99%.

“Given the impact inflation is already having on the economy, it makes no sense for the administration to continue to needlessly inflate the cost of key construction materials,” said Stephen E. Sandherr, AGC Chief Executive Officer. “Removing these tariffs will take some of the price pressure off of employers grappling to control costs.”

Backlog Up, Contractor Confidence Down

Up slightly from February and 0.5 from one year ago, the ABC reported last week that the construction backlog indicator logged 8.3. Despite the positive reading, however, the construction confidence index readings for sales, profit margins and staffing declined for the month. All three indices remain above the threshold of 50, indicating expectations of growth over the next six months.

“Demand for construction services remains strong despite sky-high materials prices, skills shortages and elevated bids,” said Basu. “ABC contractors indicate that demand will remain strong, with 65% of contractors expecting sales to grow over the next six months. Backlog increased in March, indicating that bidding opportunities remain plentiful.

“The recent rise in interest rates could induce certain project owners to move forward with construction work to access affordable investment capital while it remains available. It is also conceivable that at some point private demand for construction services will decline as the cost of capital rises.”

The ABC member survey was conducted from March 22 to April 5.

The backlog revealed a moderate drop in numbers over several sectors, including:

  • the Heavy Industrial industry, from 6.6 to 6.3;
  • the Middle States region, from 7.7 to 7.5;
  • the West region, from 7.8 to 6.3;
  • the $30-$50 million company size, from 9.6 to 8.4; and
  • the $50-$100 million company size, from 12.6 to 9.6.

The backlog witnessed rise in the following sectors:

  • the Infrastructure industry, from 6.3 to 8.2;
  • the Northeast region, from 6.9 to 8.6;
  • the South region, from 9.5 to 9.7;
  • the less than $30 million company size, from 7.1 to 7.7; and
  • the more than $100 million company size, from 11.5 to 13.8.

The backlog remained unchanged for the Commercial & Institutional industry, at 8.6.

“If the story ended with demand, it would be as gratifying as a fairy tale ending with happiness across the kingdom,” said Basu. “Alas, one must address the issue of supply. More than three-quarters of contractors indicate that they had recently suffered some setback in delivering construction services.

“Among the primary factors are a lack of sufficiently skilled workers as well as materials and equipment shortages. These dynamics will continue to increase the cost of construction delivery during months to come. The Russia-Ukraine war has exacerbated inflationary pressures and will likely result in more aggressive monetary tightening by the Federal Reserve. For now, the average contractor expects to be able to pass along a significant fraction of the cost increases to project owners. It remains to be seen whether that will persist as interest rates rise.”

   

Tagged categories: Associated Builders and Contractors Inc. (ABC); Associated General Contractors (AGC); Building materials; Contractors; Contracts; COVID-19; Economy; Finance; Good Technical Practice; Market; Market data; Market forecasts; Market trends; NA; North America; Program/Project Management; Projects - Commercial

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