Construction Costs Increase Even as Some Material Prices Drop

The cost increases for various categories of U.S. construction ranged between 0.5% for new health care building to 2.4% for new office space

CMD's Economy at a Glance for August 2015 focuses on the costs of construction in the U.S., with materials (as opposed to labor) mainly in the spotlight. The year-over-year "final demand" figure for U.S. construction in August 2015 was 1.8%. Construction material prices have been more noteworthy for their declines rather than increases.

Capital costs for private construction (1.8%) were up to almost the same degree as for public/government construction (1.9%). 

The cost increases for various categories of U.S. construction ranged between 0.5% for new health care building to 2.4% for new office space. 

Architectural and engineering service fees were estimated to have risen 2.9% annually.  

As a first step in focusing on individual input costs, energy prices stand out as a source of decline. In the U.S., regular unleaded gasoline is -34.5% year over year and diesel fuel -38%. 

Natural gas is -29.2%, with the cost of its usage in commercial, industrial and residential applications down between -11% and -15%. There has been recovery of 2.1% to 4.2% over the past three months, however. 

An important derivative of oil — asphalt — comes with a cost that is -32.2% year over year. In August alone (e.g., month to month), the price change was -9.7%. 

Energy isn’t the only input category experiencing pricing weakness. U.S. softwood lumber, which is especially important for new home framing, is -7.6% year over year. Hardwood lumber, which is more important for finishing work and cabinetry, is -11.1%. Plywood is -9.1%. 

Still, it’s worth noting that U.S. softwood lumber prices remain more than 40% above the index level they descended to in their most recent trough period, in early summer 2009. 

There is another shocker among materials used at various stages to make construction materials, all in the steel sector. ‘Iron ore’, ‘iron and steel scrap’ and ‘steel bars, plates and structural shapes’ have recorded notable year-over-year changes of -8.6%, -37.6% and -11.5% respectively. 

Furthermore, iron ore and iron and steel scrap are continuing to display extreme volatility, with big drops (-8.6% and -11.9%) during the 31 days of August. 

Copper wire and cable prices (-12.3% year over year) in the U.S. have been sliding along with the retreat in global demand for the underlying base metal. The latter has been one consequence of the slowing of the growth rate in China, from 10%-plus annually a decade ago, to perhaps only 6% this year. 

China’s importance in all resource markets has soared. It has overtaken Japan as the world’s second largest economy after America’s.   

While the foregoing stresses the downside of construction material prices, there are some inputs that have been working their way higher, although not to the same dramatic extent. 

In the U.S., the price of cement is 7.4% year over year. Over the past three years, it has climbed 17.9%. Unlike many other commodities, its price level now resides above its pre-Great Recession peak. 

In the same vein, U.S. ready-mix concrete is 3.5% year over year and the slope of its price index level, when graphed, has been on a fairly steady upward-sloping trajectory, except when it flattened out for a couple of years after the sub-prime-mortgage-induced downturn in 2008-09. 

Also in a related area, ‘construction sand, gravel and crushed stone’ is 3.9% year over year and 9.8% since August 2012. 

Gypsum is another construction material with hefty pricing credentials. While its charge has stayed essentially flat (-0.9%) over the last year, it has shot up 21.8% over the past three years. 

In the U.S., flat glass was 4.8% year over year and 10.9% compared with three years ago.