June PPIs point to tighter cost squeeze on contractors; Beige Book indicates more growth

            The producer price index (PPI) for final demand in June, not seasonally adjusted, rose 0.4% from May and 3.4% year-over-year (y/y) from June 2017, the Bureau of Labor Statistics (BLS) reported on July 11. AGC posted tables and an explanation focusing on construction prices and costs. Final demand includes goods, services and five types of nonresidential buildings that BLS says make up 31% of total construction. The PPI for new nonresidential building construction—a measure of the price that contractors say they would charge to build a fixed set of buildings—climbed 0.2% for the month and 4.3% y/y. Increases ranged from 3.5% y/y for warehouses to 4.1% for offices, 4.5% for health care and school buildings, and 5.0% for industrial buildings. PPI increases for subcontractors' new, repair and maintenance work on nonresidential buildings ranged from 1.1% y/y for roofing contractors to 4.3% for plumbing contractors, 4.7% for electrical contractors and 5.2% for concrete contractors. The PPI for inputs to construction—excluding capital investment, labor and imports—comprises a mix of goods (56%) and services (44%). This index jumped 8.1% y/y, far outrunning the 4.3% PPI increase for new nonresidential building construction, implying a growing cost squeeze for contractors. Increases for inputs to seven nonresidential building types ranged from 6.3% for industrial structures to 11% for power and communications structures. PPIs for inputs to new residential structures rose 7.8% y/y for single-family and 8.1% for multifamily. The PPI for inputs to construction rose 8.1%, with services up 6.4% and goods (including items consumed by contractors, such as diesel fuel) jumping 9.6%—a steep acceleration for the goods index from a year earlier (2.6%) and the biggest rise since October 2008. The sub-index for energy soared 35%, while the PPI for goods less food and energy rose 6.2%. Items important to construction that had major one- or 12-month price changes include diesel fuel, up 4.4% in June and 53% y/y; aluminum mill shapes, 2.1% and 20%, respectively; lumber and plywood, 2.8% and 18%; copper and brass mill shapes, 3.9% and 17%; steel mill products, 1.9% and 12%; truck transportation of freight, 1.3% and 7.7%; asphalt felts and coatings, -0.3% and 7.5%; ready-mixed concrete, -0.5% and 5.5%; and asphalt paving mixtures and blocks, 1.1% and 5.0%. Prices do not reflect the latest tariffs on steel and aluminum and on numerous imports from China, which took effect in early July and many of which affect construction. Readers are invited to send examples of price changes or project delays and cancellations due to rising prices and actual or anticipated trade measures to simonsonk@agc.org.

            "Economic activity continued to expand across the United States, with 10 of the 12 Federal Reserve Districts reporting moderate or modest growth," the Federal Reserve reported today in its latest "Beige Book," a compilation of informal soundings of business conditions in each Fed district. The summary includes these comments relevant to construction: "Shortages [of workers] were cited across a wide range of occupations, including highly skilled engineers, specialized construction and manufacturing workers, IT professionals and truck drivers; some districts indicated labor shortages were constraining growth. Districts noted firms were adding work hours, strengthening retention efforts, partnering with local schools, and converting temporary workers to permanent, as well as raising compensation to attract and retain employees....The prices of key inputs rose further, including fuel, construction materials, freight and metals; a few districts described these input price pressures as elevated or strong. Tariffs contributed to the increases for metals and lumber." AGC compiled all construction-related comments.

            The value of nonresidential construction starts in June slid 6.3% from June 2017, not seasonally adjusted, data provider ConstructConnect reported on Thursday. Nonresidential starts for the past 12 months combined inched down 0.1% from the prior 12 months. Residential starts slumped 12% y/y but posted a 1.9% gain for the 12-month total.

            Housing starts in June skidded 12% at a seasonally adjusted annual rate from May and 4.2% y/y, the Census Bureau reported today. Single-family starts declined 9.1% for the month and 0.2% y/y. Multifamily starts (in buildings with five or more units), which are often volatile, plummeted 20% and 15%, respectively. Year-to-date (first six months of 2018 compared with January-June 2017) starts, not seasonally adjusted, climbed 7.8% (8.1% for single-family and 6.5% for multifamily). Building permits, a fairly reliable indicator of near-term starts, declined 2.2% for the month and 3.0% y/y. Single-family permits edged up 0.8% for the month and 4.6% y/y. Multifamily permits decreased 8.7% and 16%, respectively. Permits increased 5.7% year-to-date (single-family, 6.6%; multifamily, 3.1%).

            The Architecture Billings Index (ABI) topped the breakeven 50 mark for the ninth month in a row, with a seasonally adjusted score of 51.3 in June, down from 52.8 in May, the American Institute of Architects reported on Wednesday. The ABI measures the percentage of surveyed architecture firms that reported higher billings than a month earlier, less the percentage reporting lower billings; any score above 50 indicates an increase in billings. Scores (based on three-month moving averages) varied by practice specialty: residential (mainly multifamily), 54.6 (up from 53.4 in May); commercial/industrial, 53.4 (up from 52.1); institutional, 51.6 (down from 53.1); and mixed practice, 49.3 (up from 48.5).

            There were 243,000 job openings in construction, not seasonally adjusted, at the end of May, up sharply from 183,000 in May 2017 and the highest May total since 2000, BLS reported on July 10 in its latest Job Openings and Labor Turnover Survey (JOLTS) release. The jump occurred even though the industry hired 499,000 employees in May, the highest May total since 2006. These figures, along with a positive June employment report (+13,000 for the month and 282,000 or 4.1% y/y), suggest contractors are still eager to hire more workers but are having difficulty finding ones who have construction experience. 

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