Construction Input Prices Increase in April
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 0.8% in April. In nonresidential construction, input prices also witnessed an increase of 0.9%.
Input Prices and Ongoing Concerns
According to the latest report, construction input prices are up 23.7% higher from a year ago—a slight decrease from March, which reported 24.4% higher from a year ago and 39.1% higher from February 2020. Nonresidential input prices are dropped 1% from March, reporting 24.0% higher prices year-over-year.
In looking to the 11 subcategories of construction materials, the association reported that input prices were up in 10 of them for the month. Softwood lumber was the only category in which prices decreased, falling 17.7% for the month and down 5.5% from last year. The largest price increases were in natural gas (16.9%) and unprocessed energy materials (10.3%).
“There are some economists who believe that inflation has peaked,” said ABC Chief Economist Anirban Basu. “Even if that were true, stakeholders should not expect dramatic declines in inflation in the near term given an array of factors placing upward pressure on prices: the Russia-Ukraine war, COVID-19, a shrunken labor force, elevated transportation costs and abundant demand for goods. Today’s PPI release indicates that producers continue to ask for and receive elevated prices for their limited production. These high input prices will continue to circulate through the economy as production continues, whether in the form of manufactured goods, buildings or infrastructure.”
Other products rising more than 1% in March include: fabricated structural metal products (2.0%); iron and steel (1.2%); steel mill products (2.4%); nonferrous wire and cable (1.3%); concrete products (1.8%); and crude petroleum (4.5%).
“According to ABC’s Construction Confidence Index, many contractors report that demand for their services remains sufficiently robust for them to pass along the bulk of their cost increases to project owners,” said Basu. “But at some point, the economy could weaken to the point that purchasers of construction services become less willing to pay elevated prices.
“The Federal Reserve is now in the middle of what will likely prove a lengthy monetary tightening process, and higher borrowing costs are rendering project starts less likely, all things being equal. That said, certain segments are likely to power through this dynamic, should it happen. That includes public construction, given the recent passage and ongoing implementation of a large-scale American infrastructure package. It should be noted that recent inflation has reduced the return taxpayers will get per dollar spent on infrastructure.”
As a result of the continued uptick in prices and inflation, the Associated General Contractors of America have again urged the Biden Administration to provide relief to hard-hit employers by ending tariffs on key construction materials and reconsidering its recently proposed Buy America regulations that will make it harder for firms to find and pay for key construction materials.
“Nonresidential contractors have endured twelve months of 20-percent increases in the cost of items they need to build projects,” said Ken Simonson, the association’s chief economist. “While they have been able to pass some of those increased costs on to clients, most of those increases have come out of their own bottom line.”
According to Simonson, April is the nineteenth-straight month in which the cost index rose more than the bid-price index on a year-over-year basis.
The producer price index for inputs to new nonresidential construction—the prices charged by goods producers and service providers such as distributors and transportation firms—rose 0.8% from March to April and 20.9% over the past 12 months. An index for new nonresidential building construction—a measure of what contractors say they would charge to erect five types of nonresidential buildings—rose 4.1% for the month and 19.9% from a year earlier.
In looking at the price index specifically, AGC notes the following increases year-over-year:
AGC officials went on to note in its report that the best way to keep costs from rising was to allow contractors to buy materials from the widest possible range of suppliers. In addition, officials suggested the elimination of measures that artificially inflate the cost of products.
“Inflexible tariffs and overly restrictive regulations are making it harder for contractors to find and pay for key materials,” said Stephen E. Sandherr, the association’s chief executive officer. “Needlessly inflating the cost of construction and leaving employers with less money available to hire new staff is a bad way to rebuild infrastructure or boost the economy.”
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%.
Backlog Up, Contractor Confidence Down
Up slightly from March and 0.9 from one year ago, the ABC reported earlier this month that the construction backlog indicator increased to 8.8 months in April. Despite the positive reading, the construction confidence index readings for sales and staffing levels declined for the month, however, the reading for profit margins moved higher. All three indices remain above the threshold of 50, indicating expectations of growth over the next six months.
“The U.S. economy is facing many headwinds, but for now, the nation’s nonresidential construction segment is handling them,” said Basu. “One might think that skilled worker shortages, sky-high materials prices, rising interest rates and financial market volatility would have affected industry momentum. Instead, backlog continues to rise, and contractors continue to expect sales, employment and profit margins to expand over the next six months. Demand for construction services remains strong.”
The ABC member survey was conducted from April 20 to May 4.
The backlog witnessed a slight rise in nearly all the sectors:
The backlog revealed a slight drop in numbers in just one sector: the South region, from 9.7 to 9.6.
“Nonresidential construction is generally a sector that lags behind the broader economy, meaning emerging economic weakness will not show up in nonresidential construction data for months to come,” said Basu. “It is conceivable that the risk of recession is overstated, and that contractors will thrive during the years ahead because of significant infrastructure spending. Conversely, it is possible that the combination of higher interest rates, stubborn inflation, depressed confidence, geopolitical conflict and an economywide downturn will have fundamentally altered the industry’s outlook a year from now. Only time will tell.”