Construction costs heat up while overall PPI cools; home builders’ gloom deepens

Construction costs heat up while overall PPI cools; home builders’ gloom deepens

The producer price index (PPI) for finished goods inched up 0.1% in July, seasonally adjusted, the Bureau of Labor Statistics (BLS) reported today. That was the smallest increase since February and brought the 12-month change to 4.2%. But the PPI for construction materials and components accelerated to a rise of 0.7% from 0.3% in June. Since July 2005, the construction PPI has risen 8.3%, double the rate of growth of the finished-goods PPI. Major materials-price increases over the past 12 months include: copper and brass mill shapes, such as pipe, wiring, faucets, and flashing, up 88%; wallboard and other gypsum products, 23%; plastic construction products like polyvinyl chloride (PVC) pipe, fittings, and membranes, 20%; steel mill products, 18%; aluminum mill shapes, 15%; and concrete products, 11%. The PPI for diesel fuel—which affects the cost of running offroad equipment, construction vehicles and fuel surcharges for delivering materials to job sites—soared 26% over 12 months. That means the delivered costs of many materials have gone up even more than their prices at the producer’s point of sale, which is what the PPI measures. BLS issued a new index for school construction that is meant to show the completed cost of a school, not just the producer price for the materials. That index climbed 5.3% in its first seven months, an annual rate of more than 9%. The PPI for finished warehouses rose 6.7% over the past 12 months.

High materials costs are causing some project delays and cancellations, especially in the public sector. The Sacramento Business Journal reported on Monday, “The state’s planned West Side office complex near the Capitol can’t be built within its budget and has been delayed indefinitely. The 1.4 million-square-foot project…once slated to start construction next year, was budgeted for $319 million in 2001. Now, it would cost about $500 million, said Bill Branch, a spokesman for the state’s Department of General Services.” The Daily Reporter (Wisconsin) reported on August 1, “The Milwaukee Metropolitan Sewerage District is considering delaying or eliminating $144 million in capital projects over the next six years to control spending….Flood-control and environmental projects…account for $73 million of the total, said Executive Director Kevin Shafer.”

But there has been a steady stream of large new nonresidential projects announced as well. “The Washington area could soon see an estimated $2.4 billion in hotel construction,” the Washington Business Journal reported on Friday, citing researcher Lodging Econometrics. “The region hasn’t seen this kind of rapid-fire hotel growth in more than a decade….In the latest data, the Washington metro area leads the nation in the number of new hotel projects.” The Houston Business Journal reported on August 4, “CB&I has won a contract worth more than $1 billion to build a liquefied natural gas import terminal expected to create over 1,000 construction jobs.” Deere reported today that its sales of construction and forestry equipment grew 13% last quarter compared to a year ago. Equipment makers Gehl and Manitowoc also reported sales gains recently.

Home builders’ confidence continued to plunge, the National Association of Home Builders (NAHB) reported today. NAHB’s index of builders’ sentiment declined seven points to 32, its lowest level since February of 1991 and the seventh consecutive decrease. "Two big factors are coloring builders' perceptions of the market right now—rising sales cancellations and substantial growth in inventories of both new and existing homes," said NAHB Chief Economist David Seiders. "These factors are largely the result of an increasing number of potential buyers adopting a 'wait-and-see' attitude because of uncertainty about where the housing market is headed, and record-high energy costs also appear to be weighing on housing demand. We're also seeing an anticipated withdrawal of investors/speculators from the market, following a major influx in 2004-2005." All three component indexes declined in August. The component gauging current single-family home sales fell seven points to 36, while the component gauging sales expectations in the next six months and the component gauging traffic of prospective buyers both fell six points, to 40 and 21, respectively.

On August 8, the Department of Energy released its first “National Electric Transmission Congestion Study” (www.oe.energy.gov/epa_sec1221.htm). The report identifies two “critical congestion areas”—southern California and the Atlantic coastal area from metropolitan New York southward through Northern Virginia—where “some combination of new transmission construction, new generation close to a major load, and demand-side management can reduce overall electricity supply costs in the affected areas by millions of dollars per year and significantly improve grid reliability. Four areas are designated “congestion areas of concern,” where a large-scale congestion problem exists or may be emerging: New England, Phoenix-Tucson, Seattle-Portland, and San Francisco Bay. The report also lists five “conditional congestion areas” where “affirmative government and industry decisions will be needed in the next few years to begin development of [specific] generation resources and the associated transmission facilities: “Montana-Wyoming (coal and wind), Dakotas-Minnesota (wind), Kansas-Oklahoma (wind), Illinois, Indiana and upper Appalachia (coal), and the Southeast (nuclear).”

Vol. 6, No. 31 · Aug. 9-15, 2006

The Data DIGest: Ken Simonson, Chief Economist, Associated General Contractors of America

Phone: 703-837-5313 · simonsonk@agc.org