Area Economy

Construction input prices inch higher; energy prices drop

August 18, 2017
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Construction input prices increased 0.3 percent in July and are up 3 percent on a year-over-year basis, according to an Associated Builders and Contractors analysis of data released by the Bureau of Labor Statistics.

Nonresidential construction input prices were in line with overall industry dynamics, increasing 0.3 percent for the month and 2.7 percent for the year.

Eight of 11 key construction input prices rose in July. Among the inputs experiencing declines in prices were crude petroleum (down 8 percent) and natural gas (down 7 percent). Natural gas prices have fallen during four of the past six months.

Perhaps the most astonishing aspect of U.S. economic performance in recent years has been the general lack of inflation. Despite recently completing eight years of economic recovery and hurtling toward full employment, the Federal Reserve’s most intensely scrutinized measure of inflation remains well below 2 percent. Even worker compensation has not risen rapidly, despite indications by construction firms, trucking enterprises, hotel operators and manufacturers of large-scale shortfalls in human capital. America is presently home to 6.2 million job openings and 7 million unemployed, which means that there is nearly one job for every person looking for one.

The lack of inflation helps explain many things, including low interest rates, rising levels of consumer indebtedness, rising home prices, high multiples on corporate earnings and elevated commercial real estate values. In other words, the reasonably strong performance of the U.S. economy and the phenomenal performance of financial markets are largely traceable to surprisingly low inflation.

It is in this context that this report is so important. Inflationary pressures are certainly apparent in the report. True, one should not make too much out of a single month of data. Moreover, one cannot make the claim that the release is consistent with anything approaching rampant inflation.

However, in certain input categories, the rise in prices has been noteworthy. For instance, steel mill products, iron and steel and softwood lumber have experienced price increases of around 10 percent over the past 12 months. With energy prices stabilizing recently, the construction producer price index likely will exhibit faster growth during the months ahead. Many contractors continue to report elevated backlog, and other leading nonresidential construction indicators remain positive.

This implies growing demand for materials in America. With the global economy firming and with the dollar being weakened a bit recently, the implication is that materials prices will continue to rise during the months ahead, along with compensation costs. These dynamics are likely to place additional pressure on construction industry profit margins.

Anirban Basu is chief economist for Associated Builders and Contractors.

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