Bad Recipe: Input Costs Up, Finished Prices Flat

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FLF members with AGC of Americas Chief Economist Ken Simonson in the middle.

“If you’re in the industry now if you’ve survived to this point you have great career prospects. The construction industry will get back to average levels and you’ll be in a great position.”

National AGC Economist Ken Simonson gave that positive assessment to a group of early and mid-career construction professionals who make up AGC’s Future Leadership Forum. That positive note was perhaps the only bright spot in the gloomy assessment that Ken provided about the current and near future of the construction industry.

One of the more alarming trends Ken cited was this: Over the last year the cost of the inputs of construction is up 4.5 percent but the price of finished products/buildings is flat even slightly down for segments like new office buildings and warehouses. “This is a recipe for driving contractors out of business” Ken noted.

Some of his bottom line predictions:

2010 will conclude with non-residential construction spending down 15-20 percent. More stimulus money is being put in place and maybe small gains in retail higher ed and hospitals but that’s about it.

2011 is the year the industry bottoms out Ken said. But having reached the bottom it’ll then be up (oh so slowly). Next year non-residential construction spending should range from flat to 5 percent. There will be less stimulus spending and state and local government spending will be weak but some increases in retail hotel higher ed and hospitals.

This relative optimism for next year stems from several months’ worth of small but consistent increases in GDP and recent steady growth in private sector employment.

For now we should look for “pinpricks” of growth on the map – small geographic areas with their idiosyncratic causes of growth like being net winners in the military’s base realignment efforts or being home to alternative energy efforts.