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Rising Costs, Uncertain Demand
Raise Construction Concerns
Producer price indexes rose again in Februrary while building permits and housing starts both declined, prompting more concerns about the near-term construction outlook.
"Construction costs continued to outpace other inflation measures in February, while demand softened for some project types," said Ken Simonson, Chief Economist for The Associated General Contractors of America (AGC) in a recent statement. Simonson was commenting on two March 18 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% in February, compared to 0.2 % for the PPI for finished goods and 0.3% 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 %, vs. 15% for the CPI," he added.
"That huge gap is especially troublesome for contractors on public projects," Simonson said. "Public agencies often rely on the CPI to project future costs, but they are coming up short of the dollars needed to award contracts. The problem is most acute with highway projects, where the huge run–ups in diesel, asphalt, concrete and steel costs have pushed up the PPI by 50% since December 2003."
February saw, "outsized increases in the PPIs for copper and brass mill shapes (5.8%); hot-rolled bars, plates and structural shapes for rebar and structural steel (3.5%) and diesel fuel (2.2%)," Simonson noted.
"Meanwhile, demand is falling for multi–unit residential projects," he added. "Census reported that multi–unit permits plunged 11% from January and 23% from February 2007. Demand for office, hotel and retail construction is reportedly weakening as well," he explained.
However, Simpson expects demand in the hospital, university, power, energy and communication construction segments to remain strong. "There is ongoing demand for these facilities, and their financing is generally more secure than for projects that depend on short-term rents," he said.
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