Simonson Says: Recent Price Stability - The Calm Before the Calm, or Before the Storm?

There has been little price movement overall in the past few months for either construction materials or bid prices, at least as measured by the Bureau of Labor Statistics’ producer price indexes (PPIs). However, the situation could change abruptly. On Sept. 13, BLS reported that the PPI for inputs to construction industries—a weighted average of the selling price of all materials used in construction plus items consumed by contractors, such as diesel fuel—climbed 0.3 percent from July to August and just 1.4 percent over the past 12 months. August was the 16th consecutive month in which the year-over-year change in the index was 2 percent or less. Only three categories of construction materials have recorded PPI increases of more than 5 percent in the latest 12 months: gypsum products, 14.0 percent; lumber and plywood, 9.0 percent; and prepared asphalt and tar roofing and siding products, 5.4 percent. In contrast, prices for metal products used in construction have been lower than a year ago: steel mill products, -3.4 percent; aluminum mill products, -2.4 percent; and copper and brass mill shapes, -1.3 percent. Even diesel prices dropped 1.6 percent from August 2012 to August 2013, although diesel is always subject to sudden reversals. Other key materials have shown little price movement one way or the other. The PPI for insulation materials rose 3.9 percent; concrete products, 3.1 percent; construction machinery and equipment, 2.5 percent; and asphalt paving mixtures and blocks, 0.6 percent. The index for plastic construction products edged down 0.1 percent; and architectural coatings, -0.8 percent. The mild moves for input prices have been matched on the bid side. Each month, BLS asks contractors what they would charge to put up several types of buildings, for which BLS separately collects estimates for materials costs. The PPI for new school construction rose just 1.2 percent from August 2012 to August 2013; new offices, 1.3 percent; new health care buildings, 1.6 percent; new industrial buildings, 2.3 percent; and new warehouses, 2.8 percent. Similarly, prices charged by various subcontractors for new, repair and maintenance work on nonresidential buildings increased very modestly: roofing contractors, 1.3 percent; concrete contractors, 1.6 percent; electrical contractors, 1.7 percent; and plumbing contractors, 1.9 percent. As for what lies ahead, distributor New South Construction Supply Corp. reported on August 29, “Prices for the majority of the items we distribute remained unchanged since the July newsletter and indications are there will be few changes in September….As demand for rebar is relatively weak and availability is good, most analysts expect domestic rebar prices to remain unchanged in September and probably through October, unless the price for scrap steel moves up substantially in September….polyethylene sheeting prices should not increase in October….Expect concrete reinforcing wire mesh prices to remain at current levels for most of the fall, unless the price of scrap steel increases in the coming months…. Prices for masonry reinforcing and anchors have held steady since the April price increase and should remain stable for the next few months.” Thompson Research Group reported on Sept. 11 in its monthly survey of building products distributors, “While building product manufacturers have been successful in passing on price increases in 2013, building product distributors continue to tell us that they are hesitant to pass on full pricing to their customers (contractors). Consensus is that distributors are ‘too scared’ of losing business if they push pricing, and it would take manufacturer capacity utilization reaching 80%-85% before distributors feel comfortable enough to push pricing. We are not too far away from that in certain categories.” Indeed, in its Sept. 16 report on August industrial production and capacity utilization, the Federal Reserve reported, “Capacity utilization rates in August for industries grouped by stage of process were as follows: At the crude stage, utilization was unchanged at 87.8 percent, a rate 1.5 percentage points above its long-run average; at the primary and semifinished stages, utilization increased 0.1 percentage point to 75.7 percent, a rate 5.3 percentage points below its long-run average; and at the finished stage, utilization moved up 0.4 percentage point to 75.8 percent, a rate 1.3 percentage points lower than its long-run average.” For now, the August price report appears to represent the calm before the continued calm. But, as folks still recovering from Hurricane Sandy’s attack late last October can attest, a calm summer is no guarantee for the fall.