WASHINGTON - “Construction costs continued to outpace other inflation measures in February, while demand softened for some project types,” noted Ken Simonson, chief economist for the Associated General Contractors of America (AGC). Simonson was commenting on the latest economic releases for February: producer price indexes (PPIs) from the Bureau of Labor Statistics (BLS) and housing permits from the Census Bureau.

“The PPI for inputs to construction industries - materials used in all types of construction plus items consumed by contractors, such as diesel fuel - climbed 0.6 percent in February, compared to 0.2 percent for the PPI for finished goods and 0.3 percent for the consumer price index (CPI), before seasonal adjustment,” Simonson observed. “That continues a trend since steel prices first jumped at the end of 2003. From December 2003 through February 2008, prices for these construction inputs have soared 31 percent versus 15 percent for the CPI.

“That huge gap is especially troublesome for contractors on public projects,” Simonson asserted. “Public agencies often rely on the CPI to project future costs but they are coming up short of the dollars needed to award contracts.

“In February, there were outsized increases in the PPIs for copper and brass mill shapes (5.8 percent); hot-rolled bars, plates and structural shapes for rebar and structural steel (3.5 percent) and diesel fuel (2.2 percent),” Simonson noted. “Still worse, all of these materials have risen even more since the PPI data was collected in mid-February.

“Meanwhile, demand is falling for multi-unit residential projects,” Simonson added. The Census Bureau reported that “multi-unit permits plunged 11 percent from January and 23 percent from February 2007. Demand for office, hotel, and retail construction is reportedly weakening as well.

“Nevertheless, I do expect continued strength for hospital, university, power, energy, and communication construction,” Simonson concluded. “There is ongoing demand for these facilities, and their financing is generally more secure than for projects that depend on short-term rents.”

Publication date:03/24/2008