Construction Costs - Q1 2017

Five years of steady expansion for the construction industry have yielded a labor market and supply and demand for building products that are pushing inflation higher. That’s the conclusion that can be drawn by the recent months’ readings on producer prices and completed construction costs.

The Bureau of Labor Statistics (BLS) reported on December 14 that the producer price index (PPI) for final demand construction, not seasonally adjusted, rose 0.8 percent year-over-year in November. Prices for final demand non-residential construction also rose 0.8 percent year-over-year. Final demand includes goods, services and five types of nonresidential buildings that BLS says make up 34 percent of total construction. Within the non-residential category, PPI increased slightly for healthcare (0.4 percent) and schools (0.1 percent) and was higher for office buildings (1.3 percennov PPI Table (1).jpgt) and warehouses (1.4 percent).

Inputs to construction also rose 0.8 percent from November 2015. Energy prices fell in November and for the full year-to-date (although that has likely reversed for the time being), which kept the PPI increase modest.

Materials that had notable price changes include diesel fuel, down 1.3 percenat for the month and 6.3 percent for the year; asphalt, up 0.2 percent for the month but down 24.1 percent year-over-year; cement, up 6.2 percent for the year; and copper and brass mill shapes, up 9.2 percent since October and 8.6 percent year-over-year. Among the most volatile materials at the moment is steel. Prices for stainless and alloy steel scrap are up 12.8 percent for the year, while iron and steel scrap jumped 11.4 percent in November and 41.8 percent year-over-year. Steel prices seem to have jumped in small part due to supply issues and in larger part due to anticipation that the Trump election means higher demand for infrastructure projects and more trade protection. At the local level, contractors have received notices of increases and impending increases for January.

Ken Simonson, chief economist for the Associated General Contractors, forecasted on November 17, 2016 that labor costs would rise three to four percent in 2017 because of a widespread shortage of construction workers. This trend, which is in part due to demographics and partly caused by more construction, is a long-term issue but the prospect of increased infrastructure spending in 2017 is pushing expectations about wages much higher.

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