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What’s It Cost? – August 2015

Influences on the cost of construction are beginning to put upward pressure on pricing. A bounce back in oil prices since the end of winter and accelerating wages are creating month-over-month increases. Because of the deflationary pressures in the second half of 2014 as oil prices plunged, most year-over-year changes are still small or negative.

The Bureau of Labor Statistics (BLS) reported June 12 that the producer price index (PPI) for final demand increased 0.3 percent, not seasonally adjusted (0.5 percent, seasonally adjusted), in May but declined 1.1 percent over 12 months. The PPI for final demand construction rose 0.3 percent in May and 2.0 percent over 12 months. The overall PPI for new nonresidential building construction climbed 1.8 percent since May 2014.

Increases in the indexes were primarily driven by rebounds in energy costs and wages, which make up 25 percent of the index for services related to construction put-in-place. Energy costs jumped 12 percent from April to May, although the price was down 36 percent year-over-year. Excluding energy, the cost of all goods used in construction actually fell three percent compared to May 2014. Significant declines were registered for steel – down 2.0 percent from April and 11 percent for the year – and lumber and plywood – down 2.4 percent and 6.9 percent respectively. Cement prices jumped 7.5 percent year-over-year and concrete moved with it, rising 4.9 percent since May 2014.

Stepping back to look at the change in prices over more than on business cycle reveals that construction costs have been influenced significantly by dramatic increases in several key categories. Building products and materials have tracked – or slightly lagged – the overall rate of producer inflation with the exception of materials dependent upon the price of oil and those – like steel, cement and copper – which had strong demand from emerging economies. Despite the relatively constant levels of pricing (except for diesel) in recent years, the costs of construction are significantly higher than at the beginning of the last decade.

An examination of the five major building materials that drive construction costs shows that prices remained at roughly the same level as 2000 until the mid-decade recovery took off in 2005. With the exception of the price of lumber – which was severely depressed by the housing decline after 2008 – the prices for the other four of the so-called “big five” materials have risen by at least 50 percent over the 2005 level. Prices for cement are more than 50 percent higher, while the cost of copper and steel have both more than doubled. Even with the steep decline in gasoline prices in the last half of 2014, gas remains more than twice as expensive as it was in 2005.

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