Construction input prices begin to trend higher
Both nonresidential and overall construction input prices increased in September, with natural gas and crude petroleum prices bouncing back, according to an analysis of the U.S. Bureau of Labor Statistics Producer Price Index.
The BLS data show 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.
It is important to note nonresidential input construction prices are 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 — nonferrous wire and cable — 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. For roughly two years, declining energy prices 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 health care 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 buyers of construction services continue to relentlessly pursue lower construction charges, even though many contractors are quite busy. 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.
The challenge for many contractors is to pass materials costs increases along to users of construction services in an effort to sustain margins. Evidence suggests this was not a major issue for construction firms prior to the Great Recession, but purchasers of construction services now are much less likely to accept significant cost inflation. The good news is with the U.S. dollar strengthening recently, sharp month-over-month increases in many construction materials prices unlikely are in the near term.
Anirban Basu is chief economist with Associated Builders and Contractors.