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Operations & Technology

Feb. 27, 2008 ― Construction PPIs Jump

February 27, 2008
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McGraw-Hill starts increase but other signs weaken.

The producer price index (PPI) for finished goods jumped 1.0% in January, seasonally adjusted, and 7.4% over the past 12 months, the Bureau of Labor Statistics (BLS) reported today. The “core” index, which omits food and energy, was up 0.4% and 2.3%.

The PPI for inputs to construction industries, which includes all materials used in construction plus items consumed by contractors, such as diesel fuel, rose 0.9% and 5.5%. Among construction segments, the largest increases were for highway and street construction, 1.5% and 12%, followed by other heavy construction, 1.0% and 8.1%; nonresidential buildings, 0.8% and 5.6%; multi-unit residential, 0.7% and 3.9%; and single-unit, 0.6% and 2.6%. The gains, especially for diesel-intensive highway construction, were propelled by the PPI for diesel fuel, 3.2% and 55%. Other commodities whose PPI increased included steel mill products, 1.3% and 4.2%; copper and brass mill shapes, 2.1% and 4.1%; asphalt paving mixtures and blocks, 1.9% and 3.6%; and concrete products, 0.6% and 3.6%. Holding down the gain in building costs were decreases for gypsum products, -0.3% and -22%; lumber and plywood, -1.8% and -5.4%; aluminum mill shapes, -0.6% and -4.0%; insulation materials, -0.4% and -3.6%; and brick and structural clay tile, -0.3% and -0.7%. BLS introduced a PPI for new industrial building construction, based on quarterly estimates of materials, labor and equipment costs plus monthly estimates from contractors as to costs for overhead and profit.

Several construction input prices appear likely to stay much higher for now than a year ago. The average retail price of on-highway diesel fuel soared 16 cents per gallon to a record $3.55, $1 (39%) higher than a year earlier, the Energy Information Administration (EIA) reported yesterday. On February 12, EIA forecasted that diesel would average $3.21 in 2008, up 11% from 2007. EIA also forecasted that the Henry Hub spot price for natural gas, the feedstock for the resins for many construction plastics, would average $8.18 this quarter, 10% higher than in the first quarter of 2007. Whether resin and plastics makers can pass the cost increase through to construction materials such as polyvinyl chloride pipe or insulation depends on demand as well as input cost.

“Rebar prices from the Commonwealth of Independent States, a major export market made up of many former Soviet republics, have risen 30% to $585 a ton through January,” the Wall Street Journal reported yesterday in a story on the rollout of a steel-futures contract on the London Metals Exchange. The spot price for copper closed yesterday at $3.74 per pound, up sharply in recent weeks and up 30% from a year earlier.

New construction starts increased 8% in January, seasonally adjusted, but was down 19% from January 2007, McGraw-Hill Construction reported on February 19, using its own database of projects. Nonresidential building rose 20% from December and 4% from January 2007. Nonbuilding construction was up 27% for the month but down 6% from a year earlier. Residential building fell 11% and 41%.

Two private indexes that are suggestive of future construction turned down this month. The American Institute of Architects (AIA)’s Architectural Billings Index slumped from 55 in December to 50.7 in January, the AIA reported on Wednesday. The index measures the difference between the number of firms reporting an increase or decrease of more than 5% in billings from the prior month, with 50 being an even balance, but the index does not weight the answers by the size of the firm or the change. Three-month moving averages for firms with multi-family residential, commercial/industrial, institutional and mixed practices all registered above 51. The National Association of Realtors (NAR) reported on Wednesday that its Commercial Leading Indicator for Brokerage Activity slipped 0.4% in the fourth quarter of 2007 but remained 0.1% above the fourth quarter of 2006.

“The index incorporates 13 variables that reflect commercial real estate activity” drawn from government and trade association series. “The latest data imply that investment in private nonresidential structures…could show only minimal growth or even decline in 2008,” NAR Chief Economist Lawrence Yun said. “Realtor members who specialize in office and industrial properties indicate in a separate survey that they anticipate a measurably lower level of business activity in the upcoming quarters.”

Recent articles suggest possible slowdowns in three still-vibrant construction markets: New York City, Utah and Washington, DC. The New York Times reported on Saturday that a “$14 billion proposal to transform Pennsylvania Station and the district around it is in danger of collapse because of the softening economy, shortfalls in government financing, political inertia and daunting logistical problems, government officials and real estate executives involved in the project said this week.” The Times reported on Sunday that economic forecasting firm Moody’s Economy.com expects the “Rocky Mountain West, partly led downward by Utah,…to have the biggest percentage decline [of any region] in construction jobs and housing starts this year, while the Southeast is likely to suffer least in total job growth….But the Church of Jesus Christ of Latter-Day Saints will spend more than $1.5 billion in Salt Lake City over the next few years on a complete renovation of several downtown blocks. That is going to happen no matter what, said Mark Knold, the senior economist for the Utah Department of Workforce Services.” The Washington Post reported yesterday, “The Washington region’s market for commercial real estate slowed notably in 2007…The slowdown in both leasing and sales is troubling for the local commercial real estate industry as 129 buildings with 15.8 million square feet of space are under construction throughout the area. Much of the space is being built on speculation, according to real estate professionals.”



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