PPI, Highway Index Show Contractors' Cost Squeeze; Reed, Census Starts Are Volatile
October 24, 2011
The producer price index for inputs to construction industries - a
weighted average of the price of all goods used in every type of construction,
plus items consumed by contractors, such as diesel fuel - was flat for September
but up 8.1 percent over the September 2010 level.
The producer price index for finished goods increased 0.5
percent, not seasonally adjusted (0.8 percent, seasonally adjusted) in
September and 6.9 percent over 12 months, the Bureau of Labor Statistics
reported Oct. 18. The PPI for inputs to construction industries - a weighted
average of the price of all goods used in every type of construction, plus
items consumed by contractors, such as diesel fuel - was flat for the month but
up 8.1 percent over the September 2010 level.
The steep year-over-year increase added
to the price squeeze on contractors, as indexes for finished buildings - which
reflect contractors’ estimates of what they would charge to put up new buildings
- rose much less. The PPI for new industrial building construction inched up
0.1 percent for the month and 2.2 percent over 12 months; offices, -0.1 percent
and 2.6 percent; warehouses, 0 and 2.8 percent; and schools, -0.1 percent and
Similarly, PPIs for subcontractors’ new,
repair and maintenance work rose modestly or slipped: concrete contractors, 0
and -0.2 percent; plumbing contractors, -0.1 percent and 2.5 percent; roofing
contractors, 0 and 3.1 percent; and electrical contractors, -0.1 percent and
Items that contributed to the large
year-over-year increase in materials costs included diesel fuel, up 3.3 percent
for the month and 39 percent over 12 months; copper and brass mill shapes, down
0.7 percent in September but up 15 percent since a year earlier; steel mill
products, -0.6 percent and 13.5 percent, respectively; and aluminum mill
shapes, -1.8 percent and 10 percent. These are products in which demand from
other industries and countries may drive prices up even when construction
demand is weak.
In contrast, PPIs for items that are
produced locally and used mainly by U.S. construction have stayed flat or
declined: concrete products, up 0.2 percent for the month and 0.3 percent over
12 months; lumber and plywood, -1.3 percent and -0.4 percent; brick and
structural clay tile, -0.4 percent and -3.2 percent; and gypsum products, -1.7
percent and -4.6 percent.
Highway contractors may be feeling
an even tighter cost pinch than building contractors. The National Highway
Construction Cost Index - an average of accepted bids on state highway
projects, adjusted for mix of project types - was steady in the first quarter
of 2011 but down 2 percent from a year earlier and down 22 percent from its most
recent peak in September 2008, the Federal Highway Administration reported Oct.
Nonresidential Construction Starts Tumble
The value of nonresidential construction starts tumbled 20
percent in September, not seasonally adjusted, reversing a 19 percent jump in
August, Reed Construction Data reported Oct. 13, based on data it collected.
For the first nine months of 2011 combined, starts were 9.8 percent higher than
year-to-date in 2010.
“Commercial starts plummeted” 37 percent
in September, Reed Chief Economist Bernard Markstein
said. “However, the year-to-date numbers were still up a healthy 13 percent
from a year ago. Meanwhile, industrial building starts continued to be a bright
spot, posting a robust gain of 25 percent for the month and a year-to-date
figure double the number for the same period a year earlier.
“Institutional building starts
took a hit, falling 21 percent in September even as the year-to-date numbers
were up 11.5 percent...Medical facilities, despite sinking 46 percent for the
month, were up 30 percent year-to-date. Heavy engineering (nonbuilding) starts
fell a relatively modest 10 percent in September” but rose 4.4 percent
Multifamily Housing Starts Soar
Housing starts soared 15 percent, seasonally adjusted in
September, and were 10 percent higher than in September 2010, the Census Bureau
reported Oct. 19. Multifamily starts accounted for all of the gain, leaping 51
percent for the month and 55 percent year-over-year. Single-unit starts rose
1.7 percent for the month but fell 4.9 percent from a year earlier. Building
permits fell 5 percent for the month but rose 5.7 percent year-over-year.
Permits for multifamily structures,
which tend to be volatile from month to month, sank 14 percent in September but
were still 11 percent higher than a year before. Single-unit permits, which are
a more reliable indicator of near-term homebuilding, dipped 0.2 percent for the
month but were up 3.5 percent year-over-year.
Modest Gains In Economic Activity
“Reports from the 12 Federal Reserve districts indicate that
overall economic activity continued to expand in September, although many
districts described the pace of growth as ‘modest’ or ‘slight’ and contacts
generally noted weaker or less certain outlooks for business conditions,” the
Fed reported Oct. 19 in the latest “Beige Book,” a summary of informal
soundings in each district conducted through Oct. 7. The districts are
referenced by the name of their headquarters cities.
“All 12 districts reported that real
estate and construction activity was little changed on balance from the prior
report. Residential construction remained at low levels, particularly for
single-family homes. That said, Philadelphia, Cleveland, and Minneapolis
noted small increases in single-family construction, and construction of
multifamily dwellings continued to increase at a moderate pace in Boston, Philadelphia, Cleveland, Kansas City, Dallas, and San
“Home sales remained weak overall, and
home prices were reported to be either flat or declining across all of the
districts. In contrast, rental demand continued to rise in a number of
districts. Commercial real estate conditions remained weak overall, although
commercial construction increased at a slow pace in most districts. Boston, Philadelphia, St. Louis and Cleveland
cited some gains in demand for construction of education, healthcare, and
institutional-related buildings, and New
York reported an increase in hotel development.
Furthermore, Philadelphia, Cleveland
noted an increase in demand for manufacturing and distribution facilities.
“Vacancy rates remained elevated,
but Boston, Atlanta, Chicago, Minneapolis and Dallas reported an increase in
leasing activity and Philadelphia and San Francisco indicated rising investor
interest in well-leased office space.”