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Nov. 20, 2006: Producer Prices Drop in October but Threat to Construction Remains

November 20, 2006
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WASHINGTON - "A welcome slide in energy costs gave producer prices, including those for construction, much-needed relief in October," said Ken Simonson, chief economist for the Associated General Contractors of America (AGC). "However, there is still a huge gap between construction materials prices and the generally benign inflation in most of the economy." Simonson was commenting on the latest producer price index (PPI) report from the Bureau of Labor Statistics.

"Plunging petroleum prices drove down the overall producer price index for the second straight month and lowered the PPI for construction materials and components for the first time since Hurricane Katrina struck in August 2005," Simonson said. "The PPI for finished goods dived 1.6 percent for the month and for the 12 months back to October 2005. The PPI for construction materials and components slipped 0.2 percent for the month but had a year-over-year increase of 6.5 percent.

"The 12-month increase for most construction inputs was milder than in recent months, thanks to easy comparisons to the immediate post-hurricane period and to fast-shrinking demand from home builders," Simonson observed. "But aside from wood products and diesel fuel, most inputs still had hefty year-over-year increases. For instance, from October 2005 to October 2006 there were double-digit increases in the PPI for copper and brass mill shapes, up 64 percent; asphalt paving mixtures and blocks, 30 percent; steel mill products, 21 percent; gypsum products, 15.5 percent; and aluminum mill shapes, 12.5 percent.

"For projects already under way, the cost of materials was even greater and was not anticipated by contractors or owners," Simonson added. "Owners should expect future bids will reflect the risk of further sudden price spikes, especially in markets where nonresidential construction is still bustling.

"Moreover, two factors make future construction cost explosions likely," Simonson explained. "First, the industry must generally use a fixed quantity of materials, unlike manufacturers that can make products smaller and lighter, or service businesses that use few materials. These materials are often in high demand worldwide, with limited supplies. A current example is the nickel used to make stainless steel. Second, materials must be physically delivered, making them subject to high freight and fuel costs, as well as transportation bottlenecks. Falling diesel prices helped contractors last month, but those prices have leveled off. I expect construction materials costs over the next year to rise at least 6-8 percent, versus 2-4 percent for the overall economy."

Publication date: 11/20/2006

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