Construction Forecasts

News & Analysis

Nonresidential Construction Materials Project Prices Moved Up in August

10/03/2012 by Bernard M. Markstein, RCD US Chief Economist

Overview
An index measuring prices for inputs used in nonresidential construction increased in August ending three months of decline. Higher oil prices contributed to the rise and will continue to feed through to various building materials prices over the next few months. Even as many prices increase, some major items had lower prices in August. These included steel mill products, extruded aluminum rod (down only slightly for the month, but their fifth consecutive monthly decline), and cement (although some concrete prices rose).

The general outlook is for building materials prices to move higher, roughly in line with overall inflation. If the economy, and consequently construction activity, proves stronger than expected, the result would be an even faster increase in building materials prices, exceeding general inflation.

Construction Materials Inflation
The Bureau of Labor Statistics (BLS) reported that the seasonally adjusted (SA) Producer Price Index (PPI) for materials and components used in construction inched up 0.2% in August after slipping 0.1% in July. The index was up 1.8% on a year-over-year basis, and 8.4% since August 2009. Meanwhile, prices for raw materials used in construction or to produce products used in construction was down for the second month in a row, declining 0.2% in both August and July. The index increased 2.4% from August 2011 and 5.9% from August 2009.

An index that measures inputs used in nonresidential construction (excluding capital equipment) reversed three months of decline, increasing 1.0% on a not seasonally adjusted (NSA) basis. The increase was sufficient to leave the index 0.7% higher than a year ago.

US Construction-Related Price Indexes

  Percent Change
  Monthly
from Previous Month

NSA data unless
otherwise indicated
3-Month Moving Average
from Previous Month

NSA data unless
otherwise indicated
Year-over-year
NSA data
3 Years Ago
NSA data
  Aug-12 Jul-12 Jun-12 Aug-12 Jul-12 Jun-12 Aug-12 Jul-12 Jun-12 Aug-12
Composite Indexes (Exclude capital equipment)      
Construction Materials*
(Unprocessed materials)
-0.2 -0.2 0.3 0.0 0.1 0.2 2.4 2.5 2.8 5.9
Materials and Components for Construction*
(Processed goods)
0.2 -0.1 0.0 0.0 0.0 0.2 1.8 1.6 2.2 8.4
       
Inputs to Construction
(Residential and Nonresidential)
(Includes inputs to maintenance and repair)
0.9 -0.7 -0.6 -0.1 -0.6 -0.2 1.0 -0.6 0.5 13.1
    Inputs to New Construction 0.8 -0.6 -0.6 -0.1 -0.5 -0.2 1.3 -0.2 0.8 12.9
        Inputs to Residential Construction 0.7 -0.4 -0.4 0.0 -0.4 -0.1 1.9 0.6 1.4 12.1
        Inputs to Nonresidential Construction 1.0 -0.9 -0.6 -0.2 -0.7 -0.2 0.7 -1.2 0.2 NA
            Inputs to Commercial Construction 0.7 -0.7 -0.5 -0.2 -0.5 -0.1 0.7 -0.5 0.7 NA
            Inputs to Industrial Construction 0.8 -0.5 -0.7 -0.1 -0.5 -0.3 1.2 -0.1 0.6 NA
            Inputs to Heavy Construction 1.3 -1.1 -0.8 -0.2 -0.8 -0.3 0.6 -1.6 -0.1 NA
       
    Inputs to Maintenance and Repair 0.7 -1.0 -0.9 -0.4 -0.9 -0.4 -1.3 -2.8 -1.4 15.3
        Inputs to Nonresidential Maintenance
        and Repair
0.7 -1.1 -1.0 -0.5 -0.9 -0.5 -1.8 -3.3 -1.9 15.8
        Inputs to Res Maintenance and Repair 0.9 -0.5 -0.6 -0.1 -0.5 -0.2 1.7 0.0 1.0 13.6
       
  (Indexes include installation and overhead)      
New Warehouse Building Construction 0.3 0.5 0.0 0.3 0.1 0.2 3.8 3.5 4.2 6.0
New School Building Construction -0.1 0.2 0.1 0.0 0.0 0.1 3.1 3.5 4.4 7.4
New Office Construction 0.0 0.0 0.1 0.0 0.0 0.1 2.4 2.4 3.5 4.2
New Industrial Building Construction 0.0 0.1 0.0 0.0 -0.1 0.0 2.0 1.9 3.3 4.6
       
Other Related Indexes      
PPI Finished Goods* 1.7 0.3 0.1 0.7 -0.2 -0.4 2.0 0.5 0.7 12.2
PPI Finished Goods less food and energy* 0.2 0.4 0.2 0.3 0.3 0.2 2.5 2.5 2.6 6.7
CPI Urban Consumer* 0.6 0.0 0.0 0.2 -0.1 -0.1 1.7 1.4 1.7 6.7
CPI Urban Consumer less food and energy* 0.1 0.1 0.2 0.1 0.2 0.2 1.9 2.1 2.2 4.8
       
Production Index: Construction Supplies* -0.1 -0.6 -0.5 -0.4 -0.9 -0.5 3.2 2.7 4.6 14.6
Retail Sales: Building & Equipment Supplies* 1.0 1.2 -2.1 0.0 -1.0 -2.5 1.5 3.0 -3.6 13.3

*Seasonally-adjusted data for percent changes for monthly and 3-month moving average data
NSA = Not seasonally adjusted, NA = Not Available
Source: Producer Price Index (PPI) - Bureau of Labor Statistics; Production Index - Federal Reserve Board; Retail Sales - Census Bureau

Construction machinery prices were unchanged (SA) in August after rising 0.2% in July. They were up 3.9% from a year earlier and 7.9% from August 2009. Construction machinery rental rates increased 0.2% (NSA) after falling 0.6% in July. On a year-over-year basis, rental rates were down 0.2%, and were up only a modest 1.0% from August 2009. With more and more builders electing to rent their equipment, we expect the upward pressure on rental rates to continue and to intensify, producing greater increases than equipment purchase prices.

US Construction-Related Price Indexes

  Percent Change
  Monthly
from Previous Month

NSA data unless
otherwise indicated
3-Month Moving Average
from Previous Month

NSA data unless
otherwise indicated
Year-over-year
NSA data
3 Years Ago
NSA data
  Aug-12 Jul-12 Jun-12 Aug-12 Jul-12 Jun-12 Aug-12 Jul-12 Jun-12 Aug-12
Assembled Equipment      
Hand and Edge tools -0.8 0.0 0.5 -0.1 0.2 0.2 1.2 2.1 2.2 1.2
Power Hand Tools 0.0 -0.4 0.0 -0.1 0.0 0.1 1.2 1.1 1.6 2.6
Appliances* 0.1 0.5 0.9 0.5 0.3 0.3 5.1 5.0 5.0 6.5
Furnaces 0.2 -0.3 0.2 0.0 -0.1 0.0 2.7 2.6 3.6 4.6
Construction Machinery* 0.0 0.2 0.3 0.2 0.3 0.3 3.9 4.3 4.4 7.9
Construction Machinery Rental (incl. oilfield equip.) 0.2 -0.6 -2.9 -1.1 0.0 -0.9 -0.2 -0.6 1.4 1.0
Trucks over 14,000 Ibs. GVW -0.1 0.6 0.1 0.2 0.1 0.0 2.7 2.8 2.8 7.4
Metal Doors, Sash and Trim -0.3 0.7 0.1 0.2 0.4 0.1 2.1 2.4 2.0 9.6

*Seasonally-adjusted data for percent changes for monthly and 3-month moving average data
NSA = Not seasonally adjusted, NA = Not Available
Source: Producer Price Index (PPI) - Bureau of Labor Statistics

Cement and Concrete
Cement prices declined for the second month in a row, down 0.5%, after falling 0.1% in July. Cement prices were up 0.8% from a year ago but were 7.0% below their August 2009 price level.

Prestressed concrete products jumped 1.8% in August, following two months of small declines. On a year-over-year basis, prices were up 2.4%, while they were 5.4% higher than three years ago. Meanwhile, precast concrete products moved in the opposite direction, dropping 1.1%. However, this followed ten months of increases. Despite that, prices were only 1.0% above their August 2011 level and 4.7% above their August 2009 level.

US Construction-Related Price Indexes

  Percent Change
  Monthly
from Previous Month

NSA data unless
otherwise indicated
3-Month Moving Average
from Previous Month

NSA data unless
otherwise indicated
Year-over-year
NSA data
3 Years Ago
NSA data
  Aug-12 Jul-12 Jun-12 Aug-12 Jul-12 Jun-12 Aug-12 Jul-12 Jun-12 Aug-12
Construction Commodities      
Dimension Stone 0.0 -0.5 0.1 -0.1 -0.1 0.0 0.8 1.5 1.7 3.9
Cement -0.5 -0.1 0.5 0.0 0.2 0.6 0.8 1.0 2.1 -7.0
Construction Sand, Gravel & Crushed Stone* -0.2 -0.3 0.3 -0.1 0.1 0.2 2.0 2.0 2.3 5.2
Softwood Plywood 0.6 0.0 1.8 0.8 0.8 1.6 27.3 27.4 24.7 28.8
Hardwood Lumber 1.9 0.1 -0.8 0.4 -0.4 -0.4 -0.9 -2.8 -2.5 8.9
Softwood Lumber* 3.4 -3.7 1.9 0.5 1.3 2.3 7.9 5.9 11.0 20.2
Other Commodities      
Industrial Natural Gas* 2.8 0.1 2.5 1.8 -1.1 -1.5 -14.9 -17.0 -18.8 -14.8
Plastic Resins & Materials 0.8 -1.1 -2.6 -1.0 -1.0 -0.4 0.2 -1.8 -1.5 20.5
Insulation Materials 0.0 3.5 0.2 1.3 1.3 0.0 7.1 8.0 5.0 17.3
Iron & Steel Scrap 9.0 -9.0 -12.4 -4.9 -7.5 -5.0 -18.7 -25.7 -18.3 35.3
Iron Ore -2.3 -5.6 1.6 -2.1 -1.3 1.3 6.7 9.2 24.7 29.9
Copper Ores 2.1 -2.5 -3.5 -1.4 -2.7 -3.0 -15.1 -23.5 -14.9 12.2
Copper Base Scrap* -1.9 -2.5 -0.6 -1.7 -0.5 -1.4 -13.3 -16.9 -10.6 32.2

*Seasonally-adjusted data for percent changes for monthly and 3-month moving average data
NSA = Not seasonally adjusted, NA = Not Available
Source: Producer Price Index (PPI) - Bureau of Labor Statistics

Energy and Related Products
Diesel fuel prices were up strongly for the second month in a row, leaping 4.9% (SA) in August after climbing 3.1% in July. Rebounding from four months of falling prices (March through June), diesel prices were up 5.2% from August 2011 and up 58.4% since August 2009.

Industrial natural gas prices clearly are moving higher, jumping up 2.8% (SA) in August after inching up 0.1% in July. Although there have now been three consecutive monthly increases, they have not been sufficient to offset the 11 monthly declines over the 13 months from May 2011 through May 2012. Thus, on a year-over-year basis, industrial natural gas prices were down 14.9% and were down 14.8% since August 2009. After a long period of rising supply exceeding demand, demand is increasing as supply plateaus. Expect natural gas prices to continue to move higher over coming months, but to remain cheap relative to oil prices.

Plastic resins and materials prices moved up 0.8% (NSA) in August after sliding 1.1% in July. Prices were only 0.2% higher than a year earlier, but they were up 20.5% from August 2009.

Asphalt prices fell for the second month in a row, tumbling 2.8% (NSA) in August after plunging 3.4% in July. Despite the two large monthly decreases, on a year-over-year basis, they were up 2.5% and were 40.6% higher than their August 2009 level. Asphalt roofing prices dropped 1.8% in August after shooting up 5.4% in July. On a year-over-year basis, prices fell 5.0%, but increased 8.0% from three years earlier.

Plastic construction products prices were unchanged in August after drifting down 0.1%, in July. Prices were up 1.7% from August 2011, and 11.2% from three years earlier. Plastics pipe prices slipped 0.1% in August, their fourth consecutive monthly decline. They were up 0.6% from last year and 24.8% higher since August 2009. Meanwhile, August plastics plumbing fixtures prices rose 0.9% after falling 0.4% in July. Prices were up 2.2% from August 2011 and 5.0% from three years earlier.

Oil prices have been increasing since the end of June, putting upward pressure on all energy prices. Gasoline prices have risen even more due to supply disruptions from refinery fires in the San Francisco area and at a major refinery in Venezuela. Gasoline prices will ease once the refineries return to normal production.

US Construction-Related Price Indexes

  Percent Change
  Monthly
from Previous Month

NSA data unless
otherwise indicated
3-Month Moving Average
from Previous Month

NSA data unless
otherwise indicated
Year-over-year
NSA data
3 Years Ago
NSA data
  Aug-12 Jul-12 Jun-12 Aug-12 Jul-12 Jun-12 Aug-12 Jul-12 Jun-12 Aug-12
Manufactured Materials      
Gypsum Products 0.3 1.4 1.1 0.9 1.0 -0.9 17.8 15.7 13.2 11.6
Petroleum refineries 6.9 -4.4 -4.5 -0.9 -4.3 -2.6 0.0 -10.6 -6.7 53.4
Diesel Fuel* 4.9 3.1 -8.8 -0.5 -2.5 -4.9 5.2 -9.3 -10.7 58.4
Asphalt -2.8 -3.4 0.0 -2.0 -0.4 1.8 2.5 7.5 10.5 40.6
Asphalt paving mixture & block mfg. -0.5 -0.6 1.2 0.0 0.0 0.8 4.7 5.0 6.3 18.0
Asphalt shingle and coating materials mfg. -1.4 3.3 0.6 0.8 1.6 1.7 -3.9 -2.5 -1.6 9.8
Asphalt Roofing -1.8 5.4 0.7 1.4 2.2 1.9 -5.0 -3.8 -6.4 8.0
       
Paint 0.0 0.1 -0.1 0.0 0.0 0.0 11.7 11.7 11.7 14.9
Plastic Construction Products 0.0 -0.1 -0.4 -0.2 -0.3 -0.2 1.7 1.6 1.9 11.2
    Plastics Pipe -0.1 -0.7 -1.3 -0.7 -1.1 -0.6 0.6 -1.7 -2.0 24.8
    Plumbing Fixtures 0.9 -0.4 0.3 0.2 0.0 0.3 2.2 1.3 3.4 5.0
Vitreous Plumbing Fixtures NA -0.5 0.0 NA 0.0 0.1 NA 1.3 2.1 NA
Ceramic Tile 1.4 -3.0 0.5 -0.4 -0.8 0.3 -1.8 -2.9 0.1 -1.7
Flat Glass 0.4 0.5 0.1 0.3 0.2 -0.1 0.8 0.7 1.4 0.5
       
Steel Mill Products -2.5 -2.8 -1.3 -2.2 -1.5 -0.6 -8.2 -5.9 -3.2 24.3
Steel Pipe and Tube* -1.9 -1.3 0.1 -1.0 -0.9 -0.5 -0.8 1.0 2.6 33.8
Hot rolled bars, plates & structural shapes -3.3 -2.3 -1.5 -2.4 -1.2 -0.7 -9.9 -6.1 -3.1 20.7
Extruded Aluminum rod, bar and other shapes -0.2 -3.4 -0.6 -1.4 -1.8 -1.3 -11.4 -11.8 -7.2 9.1
Architectural Metalwork 1.2 0.1 -0.7 0.2 -0.1 -0.1 1.8 0.4 1.0 8.0
Metal Plumbing Fixtures* 0.1 0.1 0.0 0.1 0.0 -0.1 1.2 1.2 1.5 5.3
Builders’ Hardware -0.1 -0.1 -0.2 -0.1 0.0 0.3 -0.6 1.2 1.0 9.0
Sheet Metal Products -0.2 0.0 0.1 0.0 -0.1 -0.1 -2.5 -2.1 -1.6 8.5
       
Copper and Copper Products 0.1 -1.0 -4.4 -1.8 -2.3 -2.8 -14.4 -18.6 -13.6 16.9
Copper and Brass Mill Shapes -1.0 0.5 -4.1 -1.5 -1.9 -2.7 -14.0 -16.0 -12.6 8.9
    Nonferrous Pipe and Tube -0.7 0.1 -8.1 -3.0 -3.2 -3.4 -21.1 -22.4 -17.8 7.9
       
Building Brick 0.1 0.3 0.3 0.2 0.0 -0.1 -2.7 -3.0 -3.1 -5.9
Ready Mix Concrete* 0.8 0.3 0.4 0.5 -0.1 -0.1 2.5 1.9 1.6 -0.3
Concrete Block & Brick 0.1 0.0 0.5 0.2 0.1 0.1 1.3 1.2 1.2 1.2
Prestressed Concrete 1.8 -0.2 -0.4 0.4 0.4 0.3 2.4 0.3 -0.1 5.4
Precast Concrete Products -1.1 0.3 0.1 -0.3 0.1 0.2 1.0 2.2 2.0 4.7
Concrete Pipe 0.4 1.1 -0.3 0.4 0.3 -0.1 2.0 1.4 0.5 -1.4
       
Wood Kitchen Cabinets 0.1 0.1 0.4 0.2 0.2 0.2 2.3 2.3 2.4 5.3
Millwork (window, door, cabinet)* 0.3 0.2 0.5 0.3 0.2 0.1 3.3 3.3 3.2 5.2
Engineered Wood Products 1.2 -0.9 0.6 0.3 0.6 1.4 6.2 3.7 4.7 11.1
Laminated Plastics 1.0 0.0 0.0 0.3 0.1 0.1 2.9 1.9 2.6 6.6

*Seasonally-adjusted data for percent changes for monthly and 3-month moving average data
NSA = Not seasonally adjusted, NA = Not Available
Source: Producer Price Index (PPI) - Bureau of Labor Statistics

Copper and Copper Products
After five consecutive monthly declines, copper ores prices increased 2.1% (NSA) in August, but prices were still 15.1% lower than a year ago. However, they were up 12.2% from August 2009.

Despite the rise in copper ores prices, copper base scrap prices continued their downward trek, falling 1.9% (SA) in August, and their fifth decline over the past six months. Prices decreased 13.3% from August 2011, but were 32.2% higher than three years earlier.

Prices for copper and copper products inched up 0.1% (NSA) in August, ending four consecutive monthly decreases. Prices were down 14.4% from a year earlier, but were up 16.9% from August 2009.

Copper and brass mill shapes prices fell 1.0% after increasing 0.5% in July. On a year-over-year basis, prices fell 14.0%, but were 8.9% higher since August 2009. Copper pipe (nonferrous pipe and tube) prices decreased 0.7% in August after edging up 0.1% in July. They were down 21.1% from August 2011, but were up 7.9% from August 2009.

With the U.S. economy advancing at a sluggish pace, most of Europe growing slowly or in recession, and the rate of growth of the Chinese and Indian economies slowing, expect copper and copper products prices to be on a downward trajectory for the next several months.

Other Metals
Steel mill products fell for the sixth month in a row, dropping 2.5% after plunging 2.8% in July. Prices were down 8.2% from August 2011, but were up 24.3% from August 2009. Meanwhile, hot rolled bars, plates, and structural shapes prices plummeted 3.3% in August after falling 2.3% the previous month. Prices were 9.9% lower than a year earlier, but 20.7% higher than three years earlier.

Extruded aluminum rod, bar, and other shapes prices slipped 0.2% in August, their fifth consecutive decline, following a 3.4% tumble in July. Their prices fell 11.4% from a year ago, but were up 9.1% from three years ago.

Softwood Lumber and Gypsum
Demand for softwood lumber and gypsum products is driven by developments in single-family housing construction. Over the past few months the single-family housing market has been improving, providing price support for these products.

The PPI for softwood lumber rebounded 3.4% (SA) in August after dropping 3.7% in July. The July fall in prices appears to be due to an influx of Canadian softwood imports when restrictions on Canadian imports were lower than usual under the Softwood Lumber Agreement (SLA). On a year-over-year basis, prices increased 7.9%, and were up 20.2% from August 2009.

Higher softwood lumber prices over the past few months have allowed for more Canadian imports under the SLA. The amount of softwood lumber that the Canadian provinces are allowed to export to the United States each month under the SLA is determined by where the average of previous prices over a specified four week period falls within a four tier matrix. The tiers, from most restrictions to no restrictions and the prices that determine which tier prevails for the month, are as follows.

  • The first tier is set when the average price of softwood lumber is $315 per thousand board feet or lower.
  • The second tier is triggered when the average price falls into the $316 to $335 range.
  • The third tier is for an average price that is in the $336 to $355 range.
  • The final (fourth) tier, which removes all restrictions on Canadian softwood lumber exports to the U.S., is in force when the average price is $356 or higher.

The average price for July’s limit was $343, resulting in tier 3 restrictions. The average price for August and September ($323 and $328, respectively) resulted in tier 2 restrictions. Reed economics calculates the average price to determine the tier that will prevail in October is $341, resulting in tier 3 restrictions for the month and indicating prices are likely to fall that month as Canadian softwood imports rise.

Late last year, six gypsum producers sent letters that they would raise prices 35% as of January 2012. The August PPI was up 16.1% from December, less than half of the advertised 35% increase. Further, prices were up 17.8% from a year earlier, and 11.6% higher than three years earlier.

At present, there seems to be a disconnect between the reported PPI for gypsum and the public pronouncements of major gypsum producers. Some gypsum producers have announced price increases of 25% to 30% effective January 2013. It seems unlikely that manufacturers would be implementing these large price increases if their previous price increases had not held. It is possible that some suppliers are still honoring contracts/quotes that locked in the old prices. This explanation is not totally satisfying since it is hard to imagine that there are many, if any, contracts left this late in the year that specify prices below the January 2012 quotes.

Note also that the large producers will no longer honor price quotes in advance of the placement of an order by a buyer as had been the case in the past. This allows manufacturers to raise prices more quickly in the face of rising demand.

Outlook for Construction Materials Prices
The United States economy is growing, albeit slowly. Many European countries are in recession and the remainder are facing slower growth. Meanwhile, the rest of the world is doing better, but being hurt by the poor performance of the U.S. and European economies, dragging down their economic growth as well.

Even with these headwinds, the Reed Construction Data forecast is for rising construction activity that will result in moderate upward pressure on construction materials prices. As the economy grows, prices will increase roughly commensurate with overall inflation.

If the United States experiences faster than forecast economic growth (3% or higher at an annual rate) for a few quarters or more, that would result in even more commercial construction activity and higher materials price inflation. This seems unlikely to occur anytime soon. Greater than expected economic growth in the rest of the world would push up the rate at which construction materials prices advance.

The greatest risk to materials price inflation remains rapidly rising energy prices, which is also a serious risk for world economic growth. After falling in May and June, energy prices have moved higher, putting upward pressure on most building materials prices. As always, a long, substantial, sustained increase in oil prices would adversely affect consumers and thus the performance of the economy, possibly sending the United States into recession.


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