Economic News: Market Volatility and Material Inflation

Contractors and developers should expect a few days to a few weeks of financial chaos with volatile credit rates and delayed access to credit from the bankruptcy over the weekend of the Lehman Brothers investment bank says Jim Haughey Reed Construction Data Chief Economist. Then the consequences for construction will be somewhat lower short term credit rates as the FRB adds liquidity to minimize additional bank failure but somewhat higher long term credit rates in response to the eventual inflationary impact of the added liquidity. Economic growth is likely to slow even further later this year in part due to a quicker slowdown in the commercial construction and real estate markets.

According to AGC of America Economist Ken Simonson most contractors are unlikely to be directly affected by Lehman Brothers bankruptcy or the Treasurys conservatorship of Fannie Mae and Freddie Mac and demand for nonresidential construction could change either way.

If home mortgages become cheaper and more widely available home sales should pick up generating demand for consumer-related construction such as stores selling home and yard products and retail near new housing developments Simonson says in his recent Data Digest. Freddie Mac reported on Thursday that the 30-year fixed-rate mortgage averaged 5.93% last week down from 6.35% a week earlier and 6.31% a year before. Both measures could also restore investor confidence that markets have reached their low points and that the limits of Treasury/Federal Reserve intervention have been defined. A gloomier view is that the bankruptcy is a sign that even the drastic actions with the housing lenders were not enough to stop the free-fall and that investors and lenders will continue to withhold funds from developers.

Meanwhile Simonson reports a recent slowing of construction material inflation. Click here for a spreadsheet showing changes in the producer price index (PPI) for construction materials and components.

The producer price index (PPI) for finished goods tumbled 1.6% before seasonal adjustment (-0.9% seasonally adjusted) in August but rose 9.6% over the past 12 months the Bureau of Labor Statistics reported. The PPI for inputs to construction industries a weighted average of materials used in every type of construction plus items consumed by contractors such as diesel fuel was flat for the month and up 13% over 12 months. For the month the indexes declined sharply for nonresidential segments but rose for residential construction but nonresidential costs still rose more over 12 months.

One- and 12-month changes were -1.3% and 22% for PPI for highway and street construction; -1.0% and 17% for other heavy construction; -0.4% and 12% for nonresidential buildings; 0.1% and 9.2% for new multi-unit residential; and 0.9% and 8.4% for new single-unit residential. The disparities are largely traceable to diesel fuel which plummeted 20% for the month but was up 50% over 12 months.

Building costs were pushed up for the month by a 4.7% jump in gypsum products which had fallen for two years and are still up only 1.7% over 12 months. Other big movers: asphalt paving mixtures and blocks 9.7% and 47%; steel mill products 2.2% and 41%; copper and brass mill shapes -2.1% and 3.5%.

In a sign that general contractors are having to absorb price increases rather than pass them along the PPIs for finished buildings which include overhead and profit as well as materials costs showed milder changes: 0.6% and 4.8% for new industrial building construction; -0.1% and 4.4% for new warehouses; 0% and 3.2% for new schools and -0.1% and 3.6% for new offices. Indexes that were introduced in July for prices charged by nonresidential building subcontractors showed these one-month changes: -0.3% for concrete contractors -0.1% for electrical contractors 0.1% for plumbing contractors and 1.0% for roofing contractors.