The producer price index for finished goods climbed 1.2 percent in April, not seasonally adjusted (0.8 percent seasonally adjusted), and 6.8 percent since April 2010, the Bureau of Labor Statistics reported May 12. The PPI for inputs to construction industries - a blend of all materials used in every type of construction, plus items consumed by contractors such as diesel fuel - rose 1.4 percent and 7.1 percent, respectively.

This sharp rise intensified the ongoing cost squeeze on contractors, as the PPIs for finished buildings - which measure contractors’ labor costs, overhead and expected profit as well as materials costs - rose much less. Specifically, the PPI for new industrial building construction went up 0.8 percent for the month and 1 percent over 12 months; offices, 0.8 percent and 1.5 percent; schools, 1.1 percent and 1.6 percent; and warehouses, 0.8 percent and 1.7 percent.

The squeeze also applied to new and repair work by nonresidential building subcontractors: roofing, -0.6 percent and -0.7 percent; concrete, -0.1 percent and -0.2 percent; plumbing, 1.8 percent and 1.4 percent; and electrical, 0.6 percent and 2.2 percent. Commodities that contributed disproportionately to the increase in the construction PPI included items that are produced and used globally: the PPI for diesel fuel rose 5.7 percent in April and 42 percent over 12 months; copper and brass mill shapes, 2.6 percent and 14 percent; steel mill products, 2.2 percent and 13 percent; and aluminum mill shapes, 2.8 percent and 9.1 percent.

PPIs for items for which U.S. construction is the major customer had smaller or negative changes: insulation materials, -0.2 percent for the month and 6.6 percent year-over-year; plastic construction products, 0.2 percent and 2.1 percent; construction machinery and equipment, -0.1 percent and 2.1 percent; asphalt paving mixtures and blocks, 1.8 percent and 1.6 percent; concrete mixtures and blocks, 0 and -0.1 percent; gypsum products, -4.9 percent and -2.1 percent; brick and structural clay tile, 0.2 percent and -2.6 percent; and lumber and plywood, -0.3 percent and -4.5 percent.

The steady runup in diesel and metals prices over the past several months appears to be giving way to fluctuating or even declining prices for now, based on recent movements in input prices. For instance, copper futures, which peaked at a record $4.60 per pound in early February, have oscillated around $4 per pound in the last few weeks. Prices for scrap iron, rebar and flat-rolled steel have slipped this month, according to steel-price reporting services.

The Energy Information Administration stated in its latest Short-Term Energy Outlook, released on May 10, that it “expects that on-highway diesel fuel retail prices, which averaged $2.99 per gallon in 2010, will average $3.89 per gallon in 2011 and $3.93 per gallon in 2012, reductions of 9 cents and 14 cents per gallon respectively from last month’s Outlook.” The price of “near-month” West Texas Intermediate crude oil, a major influence on diesel prices, fell from a high of $114 per barrel in April to a range around $100 - a fall equivalent to more than 30 cents per gallon - in the last week. However, flooding on the Mississippi River may interfere with some refinery operations and barge deliveries, causing regional diesel shortages or price spikes.

The value of nonresidential construction starts jumped 12 percent in April, not seasonally adjusted, above March and 14 percent above April 2010 levels, although starts for the first four months of 2011 combined remained 1percent below the same period in 2010, Reed Construction Data reported May 9, based on data it collected.

“This reverses the weak starts reports in February and March,” RCD Chief Economist Jim Haughey wrote. “Adjusting for seasonality, April starts were 7 percent above the pace in the previous three months….Commercial starts in April jumped 37 percent from March. Except for a surge last August, this was the highest total since January 2008. Private office starts nearly doubled….All other commercial sectors had big double-digit gains except the miscellaneous category. Both parking garages and warehouses had huge gains after very weak March totals….Institutional starts were steady in April and are now stalled…well below the 2009-10 monthly average….Heavy project starts rebounded 5.5 percent from a weak March, but the year-to-date average is well below the average month in 2009-10.”

Several recent reports suggest growing demand for warehouse and distribution space. The Census Bureau reported May 12 that manufacturers’ and trade inventories, adjusted for seasonal variations but not for price changes, rose 1 percent in March from February levels and 9.7 percent from March 2010. Also on May 12, Census reported that sales at nonstore retailers (mail order and Internet sales), which are typically fulfilled or shipped through large distribution or sorting centers, rose 14 percent in the first four months of 2011 from the same period of 2010, well above the 8.4 percent gain in total retail sales.

“Amazon Inc. said it could build more fulfillment centers this year than the nine facilities it had already announced,” the Wall Street Journal reported on May 11. “They will be located in [Arizona, Indiana and] Washington. In addition, the company is expanding a customer-service center in West Virginia.”

However, “Quarterly construction starts are…at all-time lows, with just 3 million square feet in the first quarter, compared with quarterly numbers ranging from 40 million to 64 million square feet through most of the last decade,” according to CoStar data, the real-estate research firm reported on May 5.

“ProLogis and AMB, the two largest developers of warehouse and distribution space, have few new projects slated for the U.S., and no spec[ulative] projects. Most of the few projects moving forward are smaller buildings - virtually no big boxes - and most are built-to-suits or pre-leased….not a single significant construction project broke ground in the most recent quarter in more than half of U.S. markets. Those that led the nation in construction, including Raleigh/Durham, North Carolina, and the Inland Empire [in California], did it on the basis of one large fully leased build-to-suit project.”

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