Producer Prices Drop in September, Still Threaten Construction

“Inflation took a vacation in September for most of the economy, but remains a problem for construction materials,” Ken Simonson, chief economist for the Arlington, VA-based Associated General Contractors of America (AGC) explains. Simonson was commenting on the Oct. 17 producer price index (PPI) report from the Bureau of Labor Statistics.

“Plunging petroleum prices drove down the overall producer price index and moderated the increase in the PPI for construction materials and components,” Simonson comments. “The PPI for finished goods plunged 1.1 percent for the month, before seasonal adjustment, and was up only 0.9 percent compared to September 2005. But the PPI for construction materials and components rose 0.3 percent, the same as in August, and had a year-over-year increase of 8.1 percent, nine times as much as the overall index.

“The 12-month increase for most construction inputs was milder than in the August report but still hard for contractors to either absorb or pass on,” Simonson observes. “For instance, the PPI for copper and brass mill shapes soared 75 percent from September 2005 to September 2006. Other large gains included asphalt paving mixtures and blocks, 33 percent; steel mill products, 23 percent; gypsum and plastic construction products, 19 percent each; aluminum mill shapes, 14 percent; and concrete products, 9.3 percent.

“I expect contractors to get good news for the next few months relative to the artificially high post-hurricane prices of last autumn,” Simonson adds. “Also, the steep drop in home construction will drive down prices for gypsum wallboard, which will help non-residential building contractors

“But, two factors leave construction vulnerable to greater upward price pressure than the economy as a whole,” Simonson explains. “First, the industry must generally use a fixed quantity of materials, unlike manufacturers that can make products smaller and lighter, or service businesses that use few materials. These materials are often in high demand worldwide, with limited supplies. Second, materials must be physically delivered, making them subject to high freight and fuel costs, as well as transportation bottlenecks.

“At the moment, falling diesel prices are helping contractors,” Simonson concludes. “But, I expect construction materials costs over the next year to rise at least 6 to 8 percent vs. 2 to 4 percent for the overall economy.”

This information was reprinted with permission by the Associated General Contractors of America (AGC), the largest and oldest national construction trade association in the United States.