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Economist: Construction materials price surge largest in seven years

Prices for inputs to construction materials are 6.4 percent higher than at the same time one year ago, according to an Associated Builders and Contractors analysis of U.S. Bureau of Labor Statistics’ most recent data. The figure is the largest respective year-over-year increase since 2011.

“Inflation is becoming more apparent in virtually every corner of the U.S. economy,” says ABC Chief Economist Anirban Basu. “Unemployment recently dipped below 4 percent for the first time since 2000. As of March, there were 6.55 million unfilled job openings and 6.59 million unemployed people. This means that the ratio of unemployed to job openings is roughly 1, implying that wage pressures will continue to build. Initial unemployment claims remain incredibly low while the so-called ‘quits’ ratio is climbing, indicating that more workers feel comfortable quitting their current jobs in pursuit of better ones.

“A number of policies are contributing to inflationary pressures. Shifting immigration policies are one factor, as are proposed tariffs, including on steel and aluminum. During the past year, iron and steel prices are up nearly 11 percent. The price of softwood lumber, which has been at the center of an ongoing trade dispute with Canada, has risen by about 10 percent. Issues revolving around Iran help explain why oil stands at $71/barrel. Recently enacted tax cuts also represent an explanatory factor; improving economic growth helps drive up prices.”

The upshot, adds Basu: “The economy and the nonresidential construction marketplace are presently strong. With the finances of many states and local governments meaningfully improving, including in states as disparate as Connecticut and Utah, the expectation is that infrastructure spending is set to rise. The next two years are shaping up to be solid ones for nonresidential construction firms. However, beyond that, the outlook becomes distinctly murky. Rising inflationary pressures are beginning to translate into higher borrowing costs. The cost of delivering construction services is also on the rise. At some point, this combination of factors will impede further progress, and may ultimately contribute to the end of the current expansion cycle.”

Associated General Contractors of America officials note that the new data indicates many members are being squeezed by higher materials prices, but unable to pass such costs along to their customers. “Contractors have started to boost the prices they charge, but they are falling further behind on the cost of materials they buy,” notes AGC Chief Economist Ken Simonson. “This imbalance poses two risks—either contractors will suffer decreased profit margins or project owners with fixed budgets will cut back on the projects they undertake.”

Along with the 6.4 percent rise for inputs to construction industries, he points to the producer price index (PPI) for nonresidential construction—a measure of what contractors say they would charge to put up a mix of school, office, warehouse, industrial and health care buildings—climbing 4.2 percent year-over-year.

“The gap between the 6.4 percent rise in the cost of construction goods and the 4.2 percent increase in prices charged is ominous,” Simonson observes. “Unfortunately, the gap may widen further if tariffs or quotas push up costs further for the many steel, aluminum and wood products used in construction.” From April 2017 to April 2018, he adds, the PPI jumped by 11.9 percent for aluminum mill shapes, 11.0 percent for lumber and plywood and 7.4 percent for steel mill products. The U.S. has been in a dispute with Canada over lumber imports; imposed tariffs on several types of steel; and, announced or recently imposed additional tariffs—not reflected in the April PPI—on steel, aluminum and numerous Chinese construction products. Other construction inputs that rose sharply in price from April 2017 to April 2018 include diesel fuel, 41.6 percent; copper and brass mill shapes, 10.5 percent; gypsum products, 7.5 percent; ready mixed concrete, 6.9 percent; and, truck transportation of freight, 6.0 percent.

AGC officials figure that the Trump Administration’s tariffs pose a real threat to the continued growth of the construction industry. As steel, aluminum, and wood prices continue to surge, contractors will be forced to charge more, potentially discouraging or delaying new infrastructure and development projects. “The new tariffs have the potential to undermine many of the benefits of the President’s recently enacted tax and regulatory reforms,” contends AGC CEO Steve Sandherr. “Instead of investing their tax savings in new personnel and equipment, many firms are being forced to use them to cover increasing steel and aluminum costs.”