This is a post from Jim Haughey's blog that covers the US construction industry.

Jim Haughey is the Chief Economist for Reed Construction Data and has over thirty years experience as a business economist, including twenty years monitoring the construction market. He has a Ph.D. degree in economics from the University of Michigan and has previously taught at the University of Michigan, Ohio University, Michigan State University and the University of Massachusetts.

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Construction Industry Forecasts

Notes from Jim Haughey - May 10, 2011

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Have commodity prices peaked?
Jim Haughey, RCD Chief Economist

If commodity price trends steady or dip lower, the year long surge in construction materials cost will ease and likely backtrack briefly.  Contractors will find their jobs costing less than bid prices in the middle of 2011. And the recent spike in general inflation will ease providing a boost to real incomes, confidence and, hence, demand for building space and facility capacity. This outlook for the rest of year has become more likely but is not yet certain.

Crude oil slipped to $102/ bbl. with gasoline at $4.00/ gal. and diesel at $4.10/ gal. The consensus crude oil price outlook for the rest of the year is about $95/ bbl.  This would drop gasoline and diesel prices about $0.15/ gal.  Futures prices for softwood lumber now suggest that summer prices will be about 10% lower than the peak prices last fall and winter. Copper prices, still near the record high level appear likely to be 8-10% lower this summer than at the beginning of the year. Cement prices are on a different cycle because cement is a domestic commodity except at the peak of the building cycle.  Prices fell in 2010 and have begun to rise slowly in 2011.

As always, accusations that speculators were behind the recent surge in commodity prices have reappeared, especially in Washington. Speculators are again being called greedy and uncaring. Demands are being made to punish them and prevent them from ever doing this to us again. Did speculators play a role in the recent price rises and are we worse off because of what they did?

Yes, speculators were very much involved in the recent rapid price rises.  But we are better off for what they did.  Speculation plays a major role in open auction commodity markets. It dampens price changes, both on the upswing and the downswing.  It eases the adjustment that both buyers and sellers have to make to changing prices. Speculation has little impact on the average price over a price cycle.  Speculation is sometimes very profitable but huge losses are almost as common. If the commodity price surge has indeed ended or even paused for a significant period, the current attack on speculators will quickly fade away as it always has before.

Ignoring the short term speculative impact, we are in the expansion phase of the worldwide business cycle and should expect faster price rises for commodities than finished products for several years. The 2010-11 commodity price surge was typical of price trends early in an expansion period.  Suppliers are slow to adjust to rapidly rising demand and the absorption of surplus inventories built up during period of slower economic growth. This delay is part ignorance, part caution and part greed.  Suppliers prefer higher prices.  Typically, they earn most of their profit during a business cycle during a few months early in the expansion when demand increases exceed supply increase and in the brief surge that comes at the peak of the business expansion when supply capacity is strained.  That price surge is still ahead in this cycle, probably late in 2012 or in 2013.



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