Construction Material Costs Increase 7.4 Percent

November 2018

The cost of many products used in construction climbed 7.4 percent over the past year due to double-digit increases in commonly used construction materials, according to an analysis by the Associated General Contractors of America of new data from the U.S. Bureau of Labor Statistics.
    
And according to an ABC analysis of the data, overall prices for nonresidential construction inputs rose 0.4 percent, reversing last month’s downward trend. Among individual subcategories, softwood lumber prices are down 0.4 percent, yet are up 5.4 percent on a year-over-year basis. Crude petroleum and natural gas prices are both up on a monthly basis, 8.7 and 1.1 percent, respectively.
    
AGC officials noted that the cost increases come as many construction firms are already grappling with shortages of skilled craftsmen essential for projects but have limited ability to increase prices for their services. Additionally, the Trump administration recently imposed an interim tariff of 10 percent on $200 billion worth of Chinese imports, including goods important to the construction industry, and plans to increase the rate to 25 percent in the new year.
    
“The new construction materials cost data likely under-reports actual price increases, since federal officials collected most of their data in the first half of the month, before new tariffs affecting many construction materials started,” said AGC Chief Economist Ken Simonson. “Contractors are paying more for the materials they use and workers they employ but aren’t able to pass most of those new costs on to their clients.”
    
Simonson noted that the producer price index for inputs to construction industries—a weighted average of all goods and services used in construction—increased 0.2 percent from August to September and soared 6.2 percent since September 2017, while the index for goods except services rose at a faster pace of 7.4 percent. In contrast, an index that measures what contractors say they would charge to construct five types of nonresidential buildings rose just 3.5 percent over the year, indicating that contractors were absorbing more of the costs than they were passing on to owners.
    
“Last month, government data indicated that construction materials prices declined in August,” said ABC Chief Economist Anirban Basu. “At that time, we viewed the one-month decline as an aberration. With the U.S. construction industry remaining active, as demonstrated by recent patterns in hiring, demand for materials domestically remains strong. Moreover, a combination of global economic growth and geopolitical intrigue has helped to push certain commodity prices higher, including crude oil, which is up 47 percent year-over-year, and natural gas.
    
“There is also the matter of trade tensions,” said Basu, “including those involving key construction materials like steel and softwood lumber. While new trade agreements have been signed with the likes of Mexico, South Korea and Canada, certain trade issues linger, including U.S. tariffs imposed on foreign steel and aluminum for reasons ostensibly related to national security. All of this is consistent with both elevated and rising construction materials prices.
    
“Today’s (Oct. 10) data are consistent with the view that the prior month’s data were anomalous,” said Basu. “Nonresidential contractors should continue to expect both rising material and human capital costs going forward. Understanding these dynamics is, of course, particularly salient to the daily lives of estimators, who arguably have today’s most difficult construction job.”
    
A survey the AGC released in August found that 80 percent of respondents reported difficulty filling hourly craft worker positions. As a result, 62 percent of firms report they are paying higher salaries to attract and retain workers. “The more firms get squeezed by higher materials and labor costs, the less likely they are to continue hiring and investing in new equipment,” said Stephen E. Sandherr, the association’s chief executive officer.