Construction Forecasts

News & Analysis

Bitter Winter Weather Twists Price Trends

02/08/2011 by Jim Haughey, RCD Chief Economist

The weather was unseasonably poor for construction work in November then worsened in December and worsened again in January with no improvement through the first week of February. After two small monthly gains, construction spending dipped 0.2% in November then plunged 2.5% in December with another large drop likely to be reported for January. Revisions in seasonal adjustment factors may temper these declines to avoid suggesting negative trends based on temporary factors but the seasonally unadjusted declines will remain and have significant short term impacts on prices, pushing some up and others down.

Less construction activity means less demand for materials, labor, equipment and other services and will cause price declines in many markets. Look for weaker winter pricing in domestic commodities such as lumber, concrete and gypsum where prices change frequently. Framing lumber prices, according to Random Lengths, rose slightly during the winter so far but would have increased more with normal weather.

Pricing for manufactured products, such as windows, HVAC or adhesives, sold at posted prices that change infrequently, have also weakened although less so. Buyers have to ask for discounts. Some manufacturers will elect to hold prices firm expecting sales demand to rebound quickly. Before the bitter winter weather the price trend for this class of products was near zero but expected to turn mildly positive by spring. That upturn may now be delayed a few months.

Pricing for metal products have experienced little if any winter weather impact. These prices are set in international markets and depend mostly on sales trends to manufacturing industries. Manufacturing activity is unusually strong including the US manufacturing sector. The steel, copper and aluminum intensive US motor vehicle industry has boosted output substantially and is aggressively hiring. Metal prices will rise during the bitter winter weather.

Energy prices are a special case. Heating fuel demand has been boosted by both cold weather and the supply concerns arising from the ongoing revolution in Egypt. Diesel prices have strengthened during the winter so far with no let up immediately ahead. The price impact on plastics will be less significant and likely will be delayed to the end of the winter.

These prices twists are temporary. They will last 3-4 months and then take a few months to unwind. They are not a long term trend. The outlook for materials price inflation remains at 5-6% for 2011-12.


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