Construction costs contracted again in August, according to IHS Markit and the Procurement Executives Group (PEG). The current IHS PEG Engineering and Construction Cost Index registered 45.4 this month, down from 49.8 in July. Both labor and material and equipment categories recorded soft pricing, pulling the overall index into contraction once again.
This month, the current materials/equipment price index fell below the neutral mark. The sub-index registered 47.5 in August, indicating falling prices. Out of the 12 categories included in the index, seven showed falling prices. Fabricated structural steel, which posted rising prices in the last three months, reverted to neutral. Transformers and electrical equipment also showed conditions unchanged from last month.
Unlike last month, only two categories showed rising prices: ready-mix concrete and wire and cable.
“The drop in the materials/equipment sub-index highlights what we think will be a central feature of the pricing environment over the second half of the year: volatility,” said John Mothersole, research director at IHS Pricing and Purchasing. “Although U.S. growth looks solid over the rest of 2016, Chinese manufacturing activity looks unsustainably strong. Its eventual slowdown coupled with a U.S. interest rate hike in December will create headwinds for commodity markets and softening conditions in materials and equipment markets in the months ahead.”
The current subcontractor labor index fell to 40.5 in August, down sharply from 48.2 in July. The sub-index has recorded its fourth consecutive month below the neutral mark. In the United States, labor costs were soft in the Midwest and South. They are mostly unchanged in the Northeast and rose in the West.
The downturn in the oil and gas market continues to apply downward pressure on wages despite a relatively tight labor market across the U.S. In Canada, labor costs fell for both Western and Eastern regions.
“Despite tight construction labor markets, subcontractor rates have shown softness over the past four months,” said Emily Crowley, senior economist at IHS Pricing and Purchasing. “Driving this downturn is the decline in oil and gas investment, particularly in the U.S. South. However, not all markets are in decline; the West Coast and the Northeast continue to outperform the rest of the country. These markets are less exposed to fluctuations in the oil and gas industry.”
The six-month headline expectations index also showed lower prices. The index moved down from 51.3 in July to 47.3 in August. The materials/equipment index fell from 52.1 to 49 this month. Seven components showed softer pricing, one was neutral and four showed rising prices.
For the past five months, expectations for materials and equipment have been switching back and forth between rising and falling prices, indicating that respondents expect volatility to continue.
Subcontractor labor price expectations continue to be soft in August. The sub-index moved down from 49.4 to 43.2. In the U.S., the only price pressure was recorded in the West. In the Midwest and South, expectations for labor follow the current costs, trending downwards. In the Northeast, labor costs will remain unchanged. In Canada, labor prices for both Eastern and Western regions are expected to be soft.
In the survey comments, few respondents have noted increased activity in the last few months. Nevertheless, slow proposal environment, especially in the oil and gas sector, continues to be highlighted.
