May Input Prices Reveal Continued Increase

THURSDAY, JUNE 23, 2022


According to an analysis of the U.S. Bureau of Labor Statistics’ Producer Price Index data by the Associated Builders and Contractors, construction and nonresidential input prices both rose 2.3% in May.

Input Prices and Ongoing Concerns

According to the latest report, construction input prices are up 21.4% from a year ago—a slight decrease from April, which reported 23.7% higher from a year ago. In March, ABC found that construction input prices were 24.4% higher from a year ago and 39.1% higher from February 2020.

Nonresidential input prices are dropped 2.1% from April, reporting 21.9% 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. The largest price increases were in natural gas (+39.7%) and unprocessed energy materials (+16.3%)—the same two subcategories reported in April.

For the month, crude petroleum was the only category in which prices decreased, down 1.6%. For the year, however, crude petroleum is up 59.0%. For the second month in a row, Softwood lumber remains as the only category where prices decreased for the year, down 21.7% from 12 months ago. Since February 2020, softwood lumber prices are up 98.2%.

“Inflationary pressures show no signs of abating,” said ABC Chief Economist Anirban Basu. “For months, economists and others have been expecting inflation to peak and then subside. Instead, the Russia-Ukraine war has disturbed markets, driving energy prices higher. Those elevated energy prices are now circulating across the economy, affecting manufacturing and distribution, and there is little prospect for inflation to meaningfully subside during the weeks ahead.

“Federal Reserve policymakers will continue to aggressively combat inflationary pressures,” said Basu. “But what the Federal Reserve most directly affects is demand for goods and services, not supply. By tightening monetary policy and raising interest rates, the Federal Reserve will suppress demand over the rest of the year. Eventually, suppliers will respond to diminished demand. This dynamic will quite likely drive the economy into recession either later this year or at some point in 2023.”

On the same day the ABC report was issued, the Associated General Contractors of America found in an analysis of government data that for the first time since material prices began to soar, contractors’ bid prices for constructing new nonresidential buildings had finally caught up in May

“After enduring more than a year of runaway increases in the cost of items needed to build projects, contractors have finally raised their bid prices by an equivalent amount,” said AGC Chief Economist Ken Simonson. “But the runup in materials costs appears likely to continue to pressure contractors’ profit margins.”

According to the AGC’s findings, producer price indexes for inputs to new nonresidential construction—the prices charged by goods producers and service providers such as distributors and transportation firms—rose 1.9% from April to May and 18.9% since May 2021. An index for new nonresidential building construction—a measure of what contractors say they would charge to erect five types of nonresidential buildings—was reported to rise by 0.4% for the month and 19.3% from the previous year.

In looking at the price index specifically, AGC reported the following increases over 12 months:

  • Diesel fuel, up 84.9%;
  • Steel mill shapes, up 32.9%;
  • Aluminum mill shapes, up 31.2%;
  • Architectural coatings and paint, up 31.6%;
  • Plastic construction, up 29.5%;
  • Gypsum building materials, up 23.9%; and
  • Truck transportation of freight, up 25.8%.

Simonson also noted on several other double-digit increases on other price indexes that affect construction. Some of which included roofing asphalt and tar products, which rose 18.9% over 12 months; insulation materials, 16.6%; paving mixtures and blocks, 16.1%; concrete products, 12.0%; and construction machinery and equipment, 11.5%.

“Based on the historical lag between the performance of the economy and nonresidential construction spending, more difficult times could be ahead for contractors in 2024 or 2025,” warned Basu.

“Higher construction prices run the risk of forcing public agencies and private developers to rethink planned projects,” said AGC’s Chief Executive Officer Stephen E. Sandherr. “Federal officials need to remove remaining tariffs, support a competitive materials market, and take every possible step to support a supply chain struggling to restart after the pandemic.”

Again, the AGC urged federal officials to remove the remaining tariffs on key construction materials and to rethink the newly released Buy America policies.

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%.

Are Prices Softening?

In a recent report issued by ConstructConnect, economists looked at whether the easing of year-over-year construction material prices was promising, or just wishful thinking.

According to the report, in June of 2021 the average year-over-year gain for the two Producer Price Index (PPI) series designed by the Bureau of Labor Statistics (BLS) to specifically capture construction input costs was +30.0%. The latest average climb for this month is down by nearly half, to +16.4%.

While the industry is still witnessing hefty year-over-year price increases for steel and aluminum products, the larger jumps are more recently being recorded in the energy-related products. Nevertheless, ConstructConnect reports that the number of inputs with outsized percentage increases over the last 12 months is considerably less than earlier this year.

Although there is encouragement that could be taken from the report that the worst of construction material inflation is receeding, there is hesitation that the numbers could only be temporary.

Earlier this month, financial services company Moody’s Analytics reported that although the U.S. economy continues to witness inflation, dropped savings rates, and increased revolving credit and interest rates, there is still reason to be optimistic that consumers won’t buckle under the pressure.

Before Moody’s released its latest analytic findings, multiple reports had pointed out that the U.S. was experiencing the highest inflation in 40 years, due to factors including pandemic supply chain bottlenecks and demand spikes after COVID-19 shutdowns, in addition to energy and food price hikes because Russia invaded Ukraine.

To mitigate these issues, the Federal Reserve began a series of interest rate hikes. Recently, the Fed was reported to have raised the rates by half a percentage point in May—the largest increase since 2000—and has signaled further half-percentage-point increases in July and August.

President Joe Biden was also reported to take action to reduce gas prices and combat inflation since March, including the release of one million barrels of oil per day from the nation’s Strategic Petroleum Reserve. Additional efforts will also address affordability for families, prescription drugs, housing and childcare.

In the report, Moody’s Analytics Chief Economist Mark Zandi explained that in recent weeks, inflation expectations have fallen and are more consistent with inflation soon receding. What gives Moody’s this indication is not the price hikes we continue to see, but bond investors when gauging the direction of monetary policy. These actions are called one-year, five-year forwards—a measure of consumer price inflation beginning one year from now over the subsequent five-year period.

Because these one-year, five-year forwards were reported to get as high as 3% in wake of the Russian invasion, the Fed was prompted to act more aggressively. Since then, the numbers have fallen back to 2.5%—the upper end of the Fed’s target for CPI inflation.

With these inflation expectations contained, it is believed that it will recede so long as the pandemic continues to fade and that the worst of the economic fallout from the Russia-Ukraine war is behind us.

Apart from these findings, Zandi also pointed out that none of the problems that typically plague the economy and cause or contribute to a near-term recession or downturn are evident at this time. Unlike the Great Recession where households and corporations struggled with record-heavy debt burdens, American families today devote smaller shares to interest and principal payments and businesses are seeing wide profit margins.

   

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

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