- According to an analysis of government data released Thursday by the Associated Builders and Contractors, construction input prices in April were 1.1% lower compared to a year ago, marking the second consecutive month of decreased project costs in comparison to the same period in 2022.
- Overall construction prices experienced a slight increase of 0.2% for the month, while nonresidential costs saw a gain of 0.4%. Despite these relatively minor increases, the noteworthy takeaway for the construction industry lies in the positive direction of material prices. They are generally moving in the right direction after experiencing historic inflation rates during the pandemic.
- Anirban Basu, the chief economist at ABC, stated that this release of the Producer Price Index (PPI) brings some good news for an industry that has seen construction costs rise by nearly 40% since the beginning of the COVID-19 pandemic. However, inflation remains a significant concern for both the industry and the broader economy.
In-Depth Examination
According to ABC, the second consecutive month of annual declines in construction material prices follows a continuous upward trend over 18 months. Notable construction materials that experienced price decreases over the past year include natural gas, which dropped by 64.1%, and softwood lumber, which decreased by 38.9%. Unprocessed energy materials also saw a significant decline of 29.1%, followed by a 20.4% drop in crude petroleum, as reported by ABC.
Despite these declining prices, Basu expressed caution regarding the recent increase in the Consumer Price Index (CPI), which rose by 4.9% over the past year in April, surpassing the Federal Reserve’s target of 2%. Basu emphasized that CPI is a more crucial indicator for monetary policy and economic sentiment. Furthermore, Basu noted that despite reduced material prices, contractors are experiencing challenges with their profit margins due to higher costs in other areas. Increased borrowing costs, labour expenses, and substantial material price increases throughout 2021 and 2022 have led to a decrease in the proportion of contractors anticipating profit margin growth over the next two quarters.
Mixed Results
Ken Simonson, the chief economist at the Associated General Contractors of America, mentioned that some materials that recently decreased in price still experienced year-over-year increases. For instance, cement prices rose by 13.7% over the course of a year, while electrical switchgear prices increased by 13.3%, concrete products by 13.2%, and gypsum building products by 12.1%, according to an AGC report. The volatility in prices for key construction materials makes it difficult for contractors to bid on projects with long completion timelines.
In addition, the AGC index measuring contractors’ bid prices showed a decline of 0.3% in April. This indicates that contractors are being squeezed by rising materials prices while the prices they charge for construction projects are decreasing, as explained by Simonson.
