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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