Construction Input Prices Increase

Both nonresidential and overall construction input prices increased in September, according to analysis of the U.S. Bureau of Labor Statistics (BLS) Producer Price Index by Associated Builders and Contractors (ABC).

The BLS data show that nonresidential input prices expanded 0.3 percent on a monthly basis in September, and overall construction prices also rose 0.3 percent on a monthly basis after declining 0.2 percent in August.

Nonresidential input construction prices are now higher on a year-over-year basis for the first time since November 2014. Just four of the 11 key nonresidential construction input prices declined on a monthly basis, and only one experienced a year-over-year decline.

“The rise in material prices both on a monthly and year-over-year basis is not good news for U.S. nonresidential construction firms,” says ABC chief economist Anirban Basu. “For roughly two years, declining energy prices had wrung much of the inflation out of the economy, allowing interest rates to remain low and the Federal Reserve to remain fixated on guiding the nation toward full employment. Energy prices are no longer falling. Moreover, wage and healthcare inflation are building, which could drive interest rates higher next year. That scenario is not good for real estate valuations and nonresidential construction.”

“Additionally, many contractors note that buyers of construction services continue to relentlessly pursue lower construction charges, even though many contractors are quite busy,” he adds. “Labor and other costs are going up, and this has a tendency to squeeze margins. To the extent that materials prices begin to rise more forcefully, this could further compress nonresidential construction margins.

Basu says a challenge for many contractors is passing material cost increases along to users of construction services in an effort to sustain margins.

“Evidence suggests that this was not a major issue for construction firms prior to the Great Recession, but purchasers of construction services are now much less likely to accept significant cost inflation,” he says. “The good news is that with the U.S. dollar strengthening recently, sharp month-over-month increases in many construction materials prices are unlikely in the near term.”

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