The construction materials price index fell 2.5% in December. This was a larger decline than the 1.8% reported for the whole economy. December prices were still 2.9% above a year earlier but further, although smaller, declines in the index are expected in January and possibly February. For the full year, the construction materials price index increased 8.2% from 2007.

Energy and metal prices fell further from mid-December to mid-January when the survey for the next PPI report was taken. Declining energy and metal prices have not yet fully been passed through to the prices of products manufactured from these commodities. The final pass through, including into freight rates, will be the key driver of declining materials prices in January and February.

The most significant declines last month were 24% for diesel fuel (at the pump), 20% for asphalt (at the refinery), 17% for nonferrous pipe and tube, 9% for plastic resins, 7% for structural steel, and 6% for aluminum. This is essentially the same list as last month and possibly next month as well. Asphalt prices could soar again if the second round of economic stimulus contains a lot of funds for highway paving. These are the most “shovel ready” projects.

There only significant price increases in December were 5% for paint and 14% for steel scrap but this is likely a short interruption of a continued decline.

The drop in materials prices in the last two months was large enough to offset slowly rising labor cost and cause a rare decline in total project costs.

Heavy contractors benefit the most from the recent price cuts. The index for the mix of materials used in highway projects declined 5.4% in December and 16.1% in the last three months. Strained DOT and public works budgets will now be able to award more work than appeared likely a few months ago.

Construction Materials Inflation – December 2008

Source: Producer Price Index, Bureau of Labor Statistics,
US Department of Labor, Federal Reserve Board, Census Bureau