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Dive brief:
- Construction entrance prices fell 1.2% in October due to lower inflation, according to a new analysis by builders and associated contractors of producer price index data from the US Bureau of Labor Statistics released Wednesday.
- According to the report, overall construction costs remain 1.1% lower than a year ago, while non-residential construction input prices fell 0.7% from last year. Then the price drop two consecutive months of slight increases, indicating some relief around inflation.
- “The October construction materials price report should be applauded by most contractors,” said Anirban Basu, ABC chief economist. “He doesn’t just do it [declining inflation] it translates into less rapid price increases for many construction inputs, but it also means the Federal Reserve is poised to start cutting interest rates sometime next year.”
Diving knowledge:
The positive report on construction input prices, however, does not suggest all risks are gone for construction firms, said Ken Simonson, chief economist at AGC.
He added that he does not share the view that the Fed is ready to cut its short-term interest rate target anytime soon. He said the Fed will likely need to see its preferred measure reach 2% and stay there for several months before discussing rate cuts. Simonson said he doesn’t expect that to happen before mid-2024.
“In short, I think the cost pressures on contractors have decreased, but they haven’t gone away,” Simonson said. “I am concerned that material cost increases could resume at any time.”
Meanwhile, several suppliers of joists and types of plumbing hardware shared announcements Wednesday morning of impending price increases of 5 percent to 10 percent, Simonson said.
Basu also stressed that the favorable construction input price report in October does not necessarily mean the end of all concerns for contractors.
“Among the reasons for the pullback in inflation is a slowdown in the economy,” Basu said. “While financial markets have focused on good inflation news in recent days, less attention has been invested in downside risks to the economy, including rising consumer debt, credit conditions more restrictive, geopolitics and the impact of the federal government. insatiable desire to take on more debt.”
However, cooling inflation is supporting an improving project financing environment, which in turn is boosting demand for construction services, Basu said.
According to the report, prices fell in two of the three energy subcategories in October. Crude oil input prices declined 2.9%, while unprocessed energy materials were flat 0.3%. Iron and steel prices also fell 2.3%, the report said.
On the other hand, the price of natural gas rose 10.9% in October, followed by a 0.8% increase in manufactured structural metal products. Concrete product prices rose 0.7% in October, the report said.
