All indications are that the steady pace of increasing construction costs will continue, and likely accelerate, into 2018. Upward pressure from growing global demand, coupled with continued growth in U.S. construction demand in 2018 will give the supply chain and specialty contractors the market support to raise prices.
The report by consultants IHS Markit and the Procurement Executives Group (PEG) indicated that price increases are becoming more widespread and consistent. Moreover, increases in finished goods and equipment are showing that raw material cost increases are being passed on through the supply chain. The IHS Markit/PEG Index was at 60.2 in November, supported by higher prices in both the materials/equipment and labor. A reading over 50 indicates rising prices. October’s headline index was 58.9. The November index saw only two categories with lower readings than October’s.
Of special note in the November survey was the accelerating increase in subcontractor pricing, owing to higher activity from a fully-employed labor supply. Emily Crowley, principal economist- pricing and purchasing for IHS Markit, noted, “Subcontractor rates continued to accelerate over November and expectations for future increases reached a five-year high. Tightening labor market conditions combined with an uptick in activity are driving expectations of future rate increases. Currently the U.S. South and West are having the most trouble finding workers leading to stronger wage escalation.'”
Thompson Research Group (TRG) reported on December 6 that announcements of future price increases for building materials are getting more numerous. In its monthly survey of building products suppliers, TRG reported that wallboard is on partial allocation in a number of U.S. markets and that all respondents expected that the 15-18 percent increase in January will be accepted, at least in part. Other major building components with 2018 price increases in the market include steel studs (15 percent), flooring (5-6 percent), insulations (8-12 percent) and concrete ($8 per yard). Respondents expected that virtually all value-added goods will see price increases in January, with little or no market pressures to push back against the increases.
November’s report on consumer and producer prices from the Bureau of Labor Statistics confirmed these surveys again. Softness in energy prices helped keep consumer prices just above the two percent target for inflation but the producer price index (PPI) for final demand rose 3.1 percent compared to November 2016 and the PPI for final demand construction jumped 3.0 percent. Inflation for completed buildings and nonresidential subcontracting remained consistent in their steady climb, with year-over-year increases ranging from 2.6 percent to 4.2 percent.
Within the categories of processed goods important to construction, the year-over-year trends for products that had spiked earlier this year have moderated while those that saw pushback against price increases have been rising more briskly. In the former category are diesel, asphalt, copper, and steel (although pricing for steel appears to be heading higher again). In the latter category, plastics and lumber have benefitted from the strength in housing demand.