Rising producer, consumer prices squeeze contractors; starts slip, MHC says

The producer price index (PPI) for finished goods rose 1.2% in January, not seasonally adjusted (1.4%, seasonally adjusted), and 4.6% over 12 months, the Bureau of Labor Statistics (BLS) reported on Thursday. The PPI for material and supply inputs to construction industries, a weighted average of all materials used in every type of project plus items consumed by contractors, rose 1.3% for the month and 1.6% over 12 months. The large one-month rise was driven increases in PPIs for diesel fuel, 11.5% and 41%, respectively; copper and brass mill shapes, 5.2% and 55%; aluminum mill shapes, 3.2% and 4.1%; steel mill products, 2.0% and -3.7%; asphalt paving mixtures and blocks, 1.9% and -4.1%; and lumber and plywood, 0.2% and 3.5%. Prices fell in January for gypsum products, -1.2% and -12%; concrete products, -0.7% and -3.2%; plastic construction products, -0.4% and -0.6%; and construction machinery and equipment, -0.1% and 0.1%. Rising materials costs added to the squeeze on contractors, as PPIs for finished buildings (which include contractors' overhead and profit) and subcontractors generally fell: new offices, -0.4% and -4.7%; warehouses, -0.1% and -5.8%; industrial buildings, -0.1% and -5.6%; schools, 0.6% and -1.7%; roofing contractors, -0.7% and -1.5%; electrical contractors, -0.1% and -3.7%; concrete contractors, 0.2% and -1.8%; and plumbing contractors, 1.0% and 0.5%. Prices of many items used in construction continue to run far ahead of year-ago levels. The national average retail price of on-highway diesel fuel rose yesterday to $2.83, up 7.6 cents (2.8%) from a week ago and 70 cents (33%) from a year ago, the Energy Information Administration reported on Monday. The Comex spot price for copper closed yesterday at $3.31 per pound, up $1.87 (130%) from a year ago. The spot price for aluminum on the London Metals Exchange closed at $2116 per metric ton, up $855 (68%) from a year ago. The New Mexico Department of Transportation (DOT) reported on February 10 that its (liquid) asphalt rack-price index for March is $632, up $39 (6.6%) from February and up $74 (13%) from March 2009. Similarly, the Illinois DOT reported on February 5 that its bituminous price index rose for the fourth straight month in February, to $507, up $46 (10%) from January and $38 (8.2%) from February 2009. The consumer price index (CPI) for all urban consumers rose 0.3% before seasonal adjustment (0.2%, seasonally adjusted) in January and 2.6% over 12 months, BLS reported on Friday. The CPI for urban wage earners and clerical workers (CPI-W), used to adjust many wage contracts in construction and elsewhere, rose 3.3% over 12 months. "The value of new construction starts slipped 1% in January [at] a seasonally adjusted annual rate...due to a pullback for nonbuilding construction (public works and electric utilities), after this sector's elevated performance in December," McGraw-Hill Construction (MHC) reported on Friday, based on data it collected. "Meanwhile, residential building in January held steady, and nonresidential building was able to register growth as the result of gains for a few structure types....'While down slightly from the previous month, January's activity is consistent with the sense that construction starts have at least stabilized at a low level,' stated Robert Murray, vice president of economic affairs for [MHC]. 'Relative to the extended decline that took place from 2006 through early 2009, that's good news. The cautionary note is that it's still too early to say that renewed expansion for overall construction activity has taken hold. On the plus side, the public works sector is seeing strength for transportation-related projects, supported by the federal stimulus funding. Single-family housing reached bottom in early 2009 and has since shown modest improvement. Nonresidential building has seen a pickup for such publicly-funded structure types as transportation terminals and courthouses. However, the commercial categories remain extremely depressed, and given tight bank lending and weak employment are likely to stay that way throughout 2010.'" Industrial production (IP) in manufacturing climbed 1.0% in January, following a dip of 0.1% in December, the Federal Reserve reported on Wednesday. IP of construction supplies also rose 1.0%, following a 1.7% drop. Capacity utilization in manufacturing, which along with IP can suggest possible future demand for factory construction, rose to 69.2% of capacity from 68.6% but remained far below its 1972-2009 average of 79.2%. Reinforcing the weak outlook for factory construction but also stronger prospects for power construction, the Fed stated, "Manufacturing capacity is estimated to decline 1.0% in 2010 following a decrease of 1.2% last year...and utilities capacity is projected to expand 2.1% this year, which is 0.3 percentage point faster than it had last year." Initial unemployment claims by workers in mass layoffs (events involving 50 or more workers) increased 19% in January on a seasonally adjusted basis, the first rise in four months, but were 28% less numerous than in January 2009, BLS reported today. Initial claims from mass layoffs in construction, which are not seasonally adjusted, declined 13%. But claims by nonresidential electrical contractors were the highest January total since the series began. "State tax collections fell for the fifth straight quarter on a year-over-year basis, but the decline during October-December 2009 was not as sharp as those during the three preceding periods," the Rockefeller Institute of Government reported today. "Total tax revenue increased in seven of 46 early reporting states in the fourth quarter of 2009.... Revenue gains toward the end of calendar 2009 were often driven by legislated tax increases rather than growth in the economy and tax base." Falling tax collections often mean states must cut spending further; cuts typically include construction.