Materials prices decline while spending enjoys robust recovery
Prices for inputs to construction industries declined 0.1 percent in July after increasing 0.2 percent in June, according to the latest producer price index released by the U.S. Bureau of Labor Statistics.
Year-over-year prices were down 3 percent in July and have been down on an annual basis for each of the past eight months. Prices of inputs to nonresidential construction industries declined 0.3 percent on a monthly basis and are down 3.9 percent on a yearly basis.
Key input prices fell or were flat in all but one category in July, and it is important to note that further downward pressure on input costs is likely to be reflected in next month's report, as well.
The state of affairs today is unprecedented. Nonresidential construction spending has been recovering robustly in the U.S. in recent months — up more than 11 percent on a year-over-year basis. On top of that, the multifamily building boom continues in most major U.S. metropolitan areas.
All things being equal, these circumstances should correspond with rising construction materials prices. But as a reflection of how global the economy has become, America's nonresidential construction recovery is taking place in the context of collapsing commodity prices.
The latest round of commodity price decreases has been spawned by softening growth in China and ongoing increases in production of key inputs worldwide, including oil. However, this form of deflation should not be troubling to contractors. If anything, it will tend to boost profit margins for the average contractor, though falling commodity prices do not represent good news for construction firms heavily invested in oil and natural gas segments.
These falling prices also imply slower increases in interest rates going forward, which will help extend the ongoing nonresidential construction recovery.
Here are the key input prices for the month and the year:
- Prices for plumbing fixtures remained flat on a monthly basis and are up 1.2 percent on a year-over-year basis.
- Softwood lumber prices expanded 6.2 percent in July, but are 3.7 percent lower than a year ago.
- Concrete product prices fell 0.1 percent in July, but are up 3.8 percent on a yearly basis.
- Crude energy materials prices declined 6.2 percent in July and are down 37.8 percent on a year-over-year basis.
- Fabricated structural metal product prices fell 0.7 percent for the month and have declined 0.4 percent on a year-over-year basis.
- Natural gas prices declined 1.9 percent in July and are 38.4 percent lower than the same time one year ago.
- Iron and steel prices were down 1.1 percent in July and are down 15 percent from the same time last year.
- Prices for prepared asphalt, tar roofing and siding fell 0.1 percent for the month and are down 0.4 percent on a year-ago basis.
- Steel mill products prices fell 1 percent for the month and are 13.2 percent lower than one year ago.
- Crude petroleum prices fell 12.3 percent in July and are down 48.8 percent from the same time one year ago.
- Nonferrous wire and cable prices fell 1.3 percent on a monthly basis and are down 5.2 percent on a yearly basis.
Anirban Basu is chief economist of Associated Builders and Contractors.