Rising construction costs reflect demand shifts, foreshadow downturn
By Larry StewartFebruary 21, 2023
“Producer price indexes for construction inputs moderated over the past year but many items increased again in January,” said Ken Simonson, the Associated General Contractors of America’s chief economist. “With demand shifting among project types, prices for many inputs are likely to diverge further in 2023.”
Analysis by the Associated Builders and Contractors of the U.S. Bureau of Labor Statistics’ Producer Price Index data revealed construction input prices rose 1.3% in January. Nonresidential construction input prices increased 1.1% for the month. Overall construction input prices are 4.9% higher than a year ago, which is the smallest annual increase since January 2021. Nonresidential construction input prices are also up 4.9% since January 2022.
The AGC’s Simonson observes diverging January price changes for key construction inputs, with steep increases for fuel, concrete and gypsum products offsetting sharp declines in lumber and steel prices.
Nonresidential prices rising?
The producer price index for inputs to new nonresidential construction – prices charged by goods producers and service providers such as distributors and transportation firms – rose 0.9% in January but increased by a relatively modest 4.3 percent from January 2022.
Falling demand for new homes drove the index for new single-family construction down to a year-over-year increase of just 0.2 percent.
The increase in January was driven by several inputs. The producer price index for diesel fuel soared 7.1 percent for the month and 22.8 percent over 12 months. The index for cement leaped 7.7 percent in January and 17.8 percent compared to a year earlier. That, in turn, fueled an increase in the index for concrete products of 1.8 percent for the month and 14.8 percent year-over-year. The indexes for architectural coatings, such as paint, gypsum building materials, such as wallboard, were flat for the month but climbed 15.8 percent and 11.1 percent, respectively over the year.
These increases more than offset several declining prices. The producer price index for steel mill products slid 2.3 percent for the month and 30.1 percent over 12 months. The index for lumber and plywood was unchanged in January but fell 30.8 percent from a year earlier.
AGC officials expressed concern that unanswered questions about what materials satisfy the “Buy American” clause in the Bipartisan Infrastructure Law will raise the cost of those materials and delay completion of federally funded infrastructure projects.
“Unfortunately, more than 15 months after enactment of the infrastructure law, the administration’s guidance about materials is still confusing, contradictory, and incomplete,” said Stephen E. Sandherr, the association’s chief executive officer. “Uncertainty about eligible materials threatens to delay needed infrastructure projects and make them much more expensive.”
Of prices, interest rates, recession risk
“Recent employment and retail sales reports indicate that the economy is not slowing nearly as quickly as predicted,” said ABC Chief Economist Anirban Basu. “That is the good news. The bad news is that the economy remains overheated, a phenomenon neatly reflected in the January PPI data, which indicated that construction input price gains accelerated on a monthly basis. For instance, construction machinery and equipment prices expanded 3.4% in January and are up more than 12% during the past year.
“The implication is that the Federal Reserve will maintain higher interest rates longer,” said Basu. “Ironically, it is the current strength of the economy that makes a recession more likely sometime during the next 12 months. At some point, higher interest rates will meaningfully affect economic activity. With industry backlog high, according to ABC’s Construction Backlog Indicator, many nonresidential contractors will feel little to no effect from higher interest rates in 2023. But in certain construction segments and locations, these dynamics could make the next two years more challenging.”