The producer price index (PPI) for finished goods tumbled 1.6% before seasonal adjustment (-0.9% seasonally adjusted) in August but rose 9.6% over the past 12 months, the Bureau of Labor Statistics reported on Friday. The PPI for inputs to construction industries, a weighted average of materials used in every type of construction plus items consumed by contractors, such as diesel fuel, was flat for the month and up 13% over 12 months. For the month, the indexes declined sharply for nonresidential segments but rose for residential construction, but nonresidential costs still rose more over 12 months. One- and 12-month changes were -1.3% and 22% for PPI for highway and street construction; -1.0% and 17% for other heavy construction; -0.4% and 12% for nonresidential buildings; 0.1% and 9.2% for new multi-unit residential; and 0.9% and 8.4% for new single-unit residential. The disparities are largely traceable to diesel fuel, which plummeted 20% for the month but was up 50% over 12 months; diesel is a major input for highway and other heavy construction. Building costs were pushed up for the month by a 4.7% jump in gypsum products, which had fallen for two years and are still up only 1.7% over 12 months. Other big movers: asphalt paving mixtures and blocks, 9.7% and 47%; steel mill products, 2.2% and 41%; copper and brass mill shapes, -2.1% and 3.5%. In a sign that general contractors are having to absorb price increases rather than pass them along, the PPIs for finished buildings, which include overhead and profit as well as materials costs, showed milder changes: 0.6% and 4.8% for new industrial building construction; -0.1% and 4.4% for new warehouses; 0% and 3.2% for new schools and -0.1% and 3.6% for new offices. Indexes that were introduced in July for prices charged by nonresidential building subcontractors showed these one-month changes: -0.3% for concrete contractors, -0.1% for electrical contractors, 0.1% for plumbing contractors and 1.0% for roofing contractors.
Many construction inputs have had further large price swings since prices for the PPI were reported around August 13. Last week, Nucor and Gerdau Ameristeel announced immediate price cuts for rebar of $30 per ton, following $70/ton reductions on August 14. The September cuts represented a $171/ton drop in the index for scrap, partly offset by a $101 increase in the base price. At the same time, Nucor-Yamato announced that its price for structural steel products would remain unchanged on October 1, as it would raise its base price enough to fully offset the drop in the scrap surcharge. Gypsum and ready-mix concrete companies have announced large price increases to take effect between September 1 and November 1. On September 3, DuPont announced price increases up to 15%, effective on September 30, for weatherization systems products, and Oliver Rubber announced a 6% price increase for retread rubber products, effective today. Several reports suggest the price of liquid asphalt has begun to retreat from the record high set in early August. For instance, on September 9, the New Mexico Department of Transportation lowered its asphalt price index for October to $845 from $851 in September and $800 in August. Suppliers of polyvinyl chloride (PVC) and other plastics products have reversed price increases or fuel surcharges as natural gas and diesel prices retreat from records set in July.
Hurricane Ike appears to have caused less damage to oil and natural-gas facilities than had been feared. The price of West Texas Intermediate crude oil for October delivery on the New York Mercantile Exchange today fell $6.57, or 6 percent, to $94.59 per barrel. Heating oil for October delivery, a product similar to diesel fuel, tumbled 15 cents a gallon, or 5%. Valero Energy, ExxonMobil and Royal Dutch Shell all reported minor to moderate damage to refineries and offshore facilities in the Gulf of Mexico. Plastics makers Dow and Formosa Plastics reported no apparent damage and were moving toward restarting operations. However, power outages may cause some short-term shortages of fuel both in Texas and along major pipeline networks. Flooding in the Midwest from the remnants of the storm may also cause disruptions of transport for some materials. The combined damage from Ike and Gustav appears to be far less than from Katrina and Rita in 2005; even those hurricanes disrupted supplies of PVC and certain other materials for months but did not trigger any lasting surges in demand or labor shortages in other regions as some had predicted.
Most contractors are unlikely to be directly affected by Lehman Brothers’ bankruptcy or the Treasury’s conservatorship of Fannie Mae and Freddie Mac, and demand for nonresidential construction could change either way. If home mortgages become cheaper and more widely available, home sales should pick up, generating demand for consumer-related construction, such as stores selling home and yard products and retail near new housing developments. Freddie Mac reported on Thursday that the 30-year fixed-rate mortgage averaged 5.93% last week, down from 6.35% a week earlier and 6.31% a year before. Both measures could also restore investor confidence that markets have reached their low points and that the limits of Treasury/Federal Reserve intervention have been defined. A gloomier view is that the bankruptcy is a sign that even the drastic actions with the housing lenders were not enough to stop the free-fall and that investors and lenders will continue to withhold funds from developers.
Congress passed a bill on Thursday to immediately transfer $8 billion from the general fund to the Highway Trust Fund. If President Bush signs the bill, as expected, it will enable the Federal Highway Administration to avert cutbacks it had announced on September 5 in reimbursements to states; such cuts threatened to trigger layoffs by highway contractors.
- Log in to post comments