The 2008 construction materials cost outlook depends on the supply-demand balance in world commodity markets, the ability of central bankers to provide adequate credit for normal business loans while the subprime mortgage losses are absorbed and buyer confidence, recently much depressed.

Each of these factors have become more negative in recent months but so far have been contained within the problem range and have not crossed into the crisis range. One or more of them could worsen significantly and push the US economy into a recession. Obviously, this would cut construction demand and quickly reduce materials demand enough for an extended period of discounted prices for construction materials. Recall that construction materials prices were steady — at a depressed level — throughout 2001-03 during that period with two brief recessions and a near recession.

Reed Construction Data believes a recession can be barely avoided but that construction demand will be weak enough for pricing trends to weaken after an initial period of price spikes stemming from world commodity shortages.

Economic growth is now beginning to slow outside the US, although it remains at a much higher level than in the US. But this slowdown will not flow through to commodity prices until well into 2008. Oil and food are the problem commodities. A normal harvest in 2008 will take the strain out of food pricing. There is real shortage oil at current high demand levels. Yes, OPEC is being too cautious, and speculators are adding to rising prices. But only new supplies and reduced demand can now bring a significant cut in oil prices. Both are on the way for late in 2008. Expect commodity prices to remain high but to rise much less in 2008 than in 2007.

Construction financing remains fragile — several more brief crisis periods with high rates and limited funds availability are still likely. But the Federal Reserve board and other central banks are willing to risk future inflation to prevent a credit shortage that alone pushes the economy into recession. The outlook is that credit issues will be less of a constraint on construction spending as the year progresses.

Confidence trends are harder to assess. The confidence indexes fell sharply in October but have not dropped since then, although some further declines early in 2008 are likely. The confidence outlook will be muddied during the presidential election year because both parties are running against the White House and Congress with no one challenging assertions that the economy is sick and getting sicker. Confidence is expected to gradually improve when it becomes clear that the sky has not fallen. Business confidence will improve first.

Containing the weakness of the three factors that threaten demand for construction materials will permit materials sales and production to slip only about 1% in 2008 although there will be a much weaker period early in the year. Materials production fell an ominous 0.9% in December. The price consequence will be smaller price increases in 2008 than in 2007. But materials price inflation will outpace inflation elsewhere in the economy because of the relatively high share of imported commodities used in construction.