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Contractors' prices are outpacing inflation
Double-digit jumps in tile, concrete and copper costs behind surge
By Laura Mandaro, MarketWatch
Last Update: 4:35 PM ET Oct 2, 2006
SAN FRANCISCO (MarketWatch) -- Homeowners looking for a good deal on a retiled bathroom or a repaved driveway are, for the foreseeable future, out of luck.
Price rises in the materials used by general contractors continue to outpace overall consumer and business inflation and will likely keep up their rapid climb for the coming year, according to a report by the Associated General Contractors of America released after their midyear meeting in San Francisco late last week.
Boosted by higher metals, concrete and fuel prices, construction input prices jumped 8.8% in August from the same month a year ago. The price index for highway and street construction jumped 13.8%, and home construction gained 8%, said the contractors group's analysis of Labor Department data.
Those gains easily overtook the 3.8% rise in the consumer price index -- the broadest gauge of consumer inflation -- and a 3.7% rise in the producer price index, which tracks the prices of wholesalers' finished goods.
"Contractors have been experiencing significant increases in the costs of construction materials and, in some instances, shortages," Stephen Sandherr, chief executive of the contractors group, which represents builders who work on commercial projects like retail stores, public works and hospitals.
"The trend we're seeing is that the inflation rate for material prices is likely to continue to be greater than the CPI or PPI," he said in an interview.
Demand for materials that go into new housing, highways and factories skyrocketed over the past few years thanks to a fast-growing housing market and rapid industrialization in China and other developing countries. But with the U.S. housing market in retreat and the economy slowing, some of that pressure has let up.
The AGC expects construction material costs to rise faster than overall prices during the next six to 12 months, if not as rapidly as they have in the past year.
Pushing costs above average, contractors are generally locked into buying fixed quantities of materials. Plus, transportation costs run high, since most materials have to be transported to the construction location.
The group says a "realistic inflation target" for construction materials may be 6% to 8%, with periods of 10% increases possible.
In recent months, the prices of some key materials, such as lumber, have dropped. Plus, natural-gas, crude-oil and gasoline futures have fallen sharply, signaling future relief on the prices of petroleum-based materials like the PVC pipe used in plumbing. But many raw materials needed for building projects have posted double-digit price gains.
Over the 12 months ending in August, the Labor Department's price index for asphalt paving mixtures jumped 38% after rising about 4% a year for each of the prior three years, according to the contractors group. Concrete prices rose 10%, while brick and structural clay tile climbed 8%. Copper products' prices ballooned 81%. And gypsum products, like wallboard, gained about 20% a year in 2004, 2005 and the last 12 months. Over the next six to 12 months, the group expects diesel, plastics and gypsum costs to decline from year-ago while prices like asphalt and copper to remain "elevated but not stratospheric."
Gypsum prices should decline as new residential construction slows. Spending on private residential projects fell 1.5% in August from July, the Commerce Department said Monday. But commercial construction outlays gained 3.4%, bringing overall construction growth to a greater-than-expected 0.3% rise.
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