Construction Costs Rebound Following Mild Producer Price Report

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Construction costs are rising faster than the March 15th producer price report from the Bureau of Labor Statistics suggests, according to Ken Simonson, chief economist for the Associated General Contractors of America (AGC). "Steel is getting especially hot, and diesel is adding fuel to the inflation fire," he said.

"The PPI (producer price index) for construction materials and components edged up only 0.1 percent in February," Simonson remarked. "But data for this index was collected on February 13, and there have been some notable price increases occurring or announced since then.

"For instance, steel mills have announced two big increases for reinforcing and structural steel—types used widely in highways, buildings, parking structures and other construction," Simonson commented. "On March 1, many mills increased prices by $15 per ton. This week, they announced a whopping $55 increase to take effect on April 1. That would make the total increase since January 1 about $100, or nearly 40 percent.

"These steel increases are roughly as extreme as in early 2004, the year that kicked off a three-year binge of materials cost escalation," Simonson observed. "This year, as in 2004, price hikes for other materials, such as diesel fuel and asphalt, are going to hit construction especially hard.

"The retail price of diesel fuel soared 21 cents a gallon in the month since the PPI data was collected, according to weekly surveys by the Energy Information Administration," Simonson pointed out. "That hits contractors three ways: directly in the cost of operating offroad machinery and construction trucks, and through surcharges on deliveries of materials and equipment to job sites. The PPI for diesel was up 7 percent in February, and these increases will easily double that. Based on futures prices, more is probably on the way.

"Asphalt prices, which jumped 14 percent at the refinery level last month, will soon rise for paving and roofing contractors," Simonson predicted. "Paving asphalt also uses a lot of aggregate, or crushed stone. That PPI jumped 1.9 percent in February and 3.9 percent in the past three months.

"Road construction will bear the brunt of these increases, because highway and bridge contractors use so much diesel, asphalt, steel for bridges and guardrails, and concrete, which also is rising in price," Simonson concluded. "Other heavy and building construction will also feel the pain. In contrast, falling gypsum prices and a multi-year drop in lumber prices are holding down single-family homebuilding costs. The catch there is that nobody is putting up houses."

The AGC is the largest and oldest national construction trade association in the United States. It represents more than 32,000 firms, including 7,000 general contractors and more than 11,000 specialty-contracting firms. For more information, visit www.agc.org.

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