Press Release

RISING COSTS, UNCERTAIN DEMAND SQUEEZE NONRESIDENTIAL CONSTRUCTION, AGC SAYS

Washington, D.C. — "Construction costs continued to outpace other inflation measures in February, while demand softened for some project types," Ken Simonson, Chief Economist for The Associated General Contractors of America (AGC), said today. Simonson was commenting on two new economic releases for February: producer price indexes (PPIs) from the Bureau of Labor Statistics (BLS) and housing permits from the Census Bureau.

"The PPI for inputs to construction industries–materials used in all types of construction plus items consumed by contractors, such as diesel fuel–climbed 0.6 percent in February, compared to 0.2 percent for the PPI for finished goods and 0.3 percent for the consumer price index (CPI), before seasonal adjustment," Simonson observed. "That continues a trend since steel prices first jumped at the end of 2003. From December 2003 through February 2008, prices for these construction inputs have soared 31 percent, vs. 15 percent for the CPI.

"That huge gap is especially troublesome for contractors on public projects," Simonson asserted. "Public agencies often rely on the CPI to project future costs but they are coming up short of the dollars needed to award contracts. The problem is most acute with highway projects, where the huge run–ups in diesel, asphalt, concrete and steel costs have pushed up the PPI by 50 percent since December 2003.

"In February, there were outsized increases in the PPIs for copper and brass mill shapes (5.8 percent); hot–rolled bars, plates and structural shapes for rebar and structural steel (3.5 percent) and diesel fuel (2.2 percent)," Simonson noted. "Still worse, all of these materials have risen even more since the PPI data was collected in mid–February. Yesterday, the Energy Information Administration reported that on–highway diesel costs $3.97 a gallon nationally, up 69 cents in the five weeks since the PPI reporting date and up $1.29 or 48 percent from a year ago.

"Meanwhile, demand is falling for multi–unit residential projects," Simonson added. "Census reported today that multi–unit permits plunged 11% from January and 23% from February 2007. Demand for office, hotel and retail construction is reportedly weakening as well.

"Nevertheless, I do expect continued strength for hospital, university, power, energy and communication construction," Simonson concluded. "There is ongoing demand for these facilities, and their financing is generally more secure than for projects that depend on short–term rents."

NOTE: A chart comparing the increase in the PPI for construction inputs and the CPI is at www.agc.org/febppi. For a more detailed discussion of trends in construction activity, materials costs, and labor, see AGC's Construction Inflation Alert at www.agc.org/cia.

The Associated General Contractors of America (AGC) is the largest and oldest national construction trade association in the United States. AGC represents 33,000 firms, including 7,500 of America's leading general contractors and 12,500 specialty–contracting firms. More than 13,000 service providers and suppliers are associated with AGC through a nationwide network of chapters. Visit the AGC Web site at www.agc.org. AGC members are "Building Your Quality of Life."

###