Data Digest: Materials costs outrun building, road, consumer prices; Fed, NABE surveys find gains

Click here to view March PPI tables. The producer price index (PPI) for finished goods jumped 1.3%, not seasonally adjusted (0.7%, seasonally adjusted), in March and 5.8% over the past 12 months, the Bureau of Labor Statistics (BLS) reported on Thursday. The PPI for inputs to construction—a weighted average of the prices of all materials used in construction plus items consumed by contractors, such as diesel fuel—leaped 2.0%, not seasonally adjusted, for the month and 6.9% over 12 months. This hike added to the cost squeeze on contractors, who have been unable to pass through materials costs in their bids on new buildings. The PPI for new industrial buildings fell 0.3% in March and rose just 0.5% over 12 months; offices, 0 and 0.7%, respectively; warehouses, 0 and 1.0%; and schools, -0.1% and 1.3%. The squeeze also hit subcontractors. The PPI for nonresidential new and repair work by roofing contractors rose 0.4% for the month but fell 0.4% over 12 months; concrete contractors, 0 and 0.1%; plumbing contractors, 0.2% and 0.5%; and electrical contractors, -0.2% and 1.8%. The largest year-over-year increases in materials prices were for diesel fuel, up 11% in March and 42.5% since March 2010; copper and brass mill shapes, down 6.0% in March but up 17% over 12 months; steel mill products, up 5.3% and 15%, respectively; and aluminum mill shapes, 1.9% and 12%. All of these materials are in demand globally and use raw materials in close supply-demand balance. Materials produced in the U.S. and used mainly by construction have generally had smaller year-over-year increases, or even declines: brick and structural clay tile, -1.0% for the month and -3.3% over 12 months; concrete products, 0 and -0.6%; lumber and plywood, 0.6% and 0.7%; asphalt paving mixtures and blocks, 0 and 1.8%; plastic construction products, 1.4% and 2.5%; gypsum products, 7.0% and 5.4%; and insulation materials, 0.6% and 6.5%. The National Highway Construction Cost Index (NHCCI) slipped to 1.05 in the fourth quarter of 2010, down from 1.06 in the third quarter and down 22% from the peak in the third quarter of 2008, the Federal Highway Administration reported on April 4 (www.fhwa.dot.gov/ohim/nhcci/index.cfm). On its website, the agency explains, “The NHCCI is intended to cover the universe of highway projects and therefore arrive at an average cost index for all highway construction.” The NHCCI uses actual awarded contracts and thus includes contractors’ materials, labor and overhead. The consumer price index (CPI) for all urban consumers—the most commonly cited measure of inflation—rose 1.0%, not seasonally adjusted (0.5%, seasonally adjusted), in March but only 2.7% over 12 months, BLS reported today. The relatively mild rise in the CPI may make it harder for contractors to make owners aware of the spike in construction costs. “Economic activity generally continued to improve” in the past six weeks, the Fed reported on Wednesday in the latest Beige Book, a summary of informal business surveys conducted by the 12 regional district banks, which are referenced by the name of their headquarters cities. “While many districts described the improvements as only moderate, most districts stated that gains were widespread across sectors, and Kansas City described its economic gains as solid…. The ability to pass through cost increases varied across districts, with manufacturers generally finding less resistance to price increases than either retail or construction (where weak demand was a limiting factor)….All 12 districts reported that manufacturing activity increased since their previous reports….Dallas said overall demand in manufacturing rose slightly from low levels, noting gains in food, plastics, and construction-related products….St. Louis mentioned that automobile parts and electrical equipment manufacturers reported plans to open new plants in their district….Residential construction was described by Chicago as subdued and the spring building season is likely to be slower than previously anticipated….Philadelphia reported that agents were seeing a pickup in inquiries, showings, and traffic, although there was little increase in sales or construction….The multifamily markets strengthened in several Districts, including Chicago, Dallas, Minneapolis, and San Francisco, both in terms of leasing and construction activity….Chicago and Kansas City cited moderate gains in [nonresidential] construction, with Chicago highlighting gains in healthcare and automotive industries. Improvements in the Cleveland district were also driven by healthcare projects and, to a lesser extent, by manufacturing and energy.” “Job creation in the [first] quarter, as well as the outlook for the next six months, is stronger than…in the entire survey history dating back to 1982,” the National Association for Business Economics (NABE) reported today in summarizing responses from 72 corporate economists. “Supporting this growth, both recent results and the outlook for sales and profit margins continue to improve.” Of the 50 respondents who reported on planned spending on structures in the next 12 months, 44% said spending would increase compared with the past 12 months, vs. 20% who said spending would decrease, the third straight quarter in which positive responses outnumbered negative ones. Industrial production for manufacturing rose for the fourth straight month in March, by 0.7%, seasonally adjusted, the Fed reported on Friday. The Fed noted, “the output of construction supplies rose 1.5% in March. This index has risen more than 12% from its trough during December 2009 but remains about 25% below its peak in December 2006.” Capacity utilization in manufacturing climbed for the ninth month in a row to 75.3% of capacity in March, although it remained below the 1972-2010 average of 79.0%. Over time, rising output and capacity utilization generate demand for factory construction.