Orders and shipments for construction materials and supplies tumbled steeply in November according to the latest Census Bureau data released last week. This means that materials buyers should expect a prolonged period of weaker pricing, coming right at the end of the sharp October-December price cuts that resulted from the bursting of the worldwide commodity bubble.

Adjusting for materials price inflation, the volume of construction materials and supplies sales declined at a 6% annual pace since the end of the housing boom in February 2006. Inflation was high in 2006-07, surged higher in the first half of 2008 and then prices fell 5.5% from July to November. The decline in materials purchases accelerated in November. Sales fell 3.3% as prices fell 3.2%. This is about a 6.5% volume decline in one month.

This outsized drop is consistent with the layoff of 82,000 construction workers in November and the 3.2% fall in the industrial production index for construction materials and supplies in the same month. US construction materials suppliers in November experienced a 3.6% monthly decline in orders, a 1.3% decrease in unfilled orders and increased their inventory 3.1% when they were trying to cut inventory. Their inventory/sales ratio jumped from 1.43 to 1.47, equivalent to an extra day of inventory.

Construction activity almost certainly declined significantly in December, although the projected declines in December through the summer will be at a slower pace. The exaggerated decline in November was the consequence of the suddenly more severe recession after the credit market nearly collapsed around Labor Day. Materials suppliers will remain in crisis mode for several more months, aggressively cutting production and disposing of surplus inventory

The price weakness will not be uniform. Energy based prices had not fully adjusted to $40/bbl. crude oil when the latest Israeli assault on Palestine bumped oil prices back to $50. Even at this level, energy based products, including freight, still have some price decline ahead. This ranges from more than 20% for fuel to perhaps 1% for items with no energy content other than transportation. Metals prices have the most prospective decline because they are set in auction markets. Suppliers of products specialized to nonresidential buildings enjoyed the balance of priding power for several years well into 2008 but have now lost it as construction activity will decline up to 10% through the summer.

Suppliers of products specialized to civil construction are similarly losing pricing power. However, some regional supply constraints for asphalt and cement products will keep regional price trends varied. Also, the revised Obama economic stimulus plan, according to the latest leaks, focuses on grants and tax incentives for infrastructure construction. If enacted quickly this will cushion the price declines in civil construction later in 2009.