Inflation and Nonresidential Buildings

Who hasn’t been confronted with higher prices at the fuel pump, the grocery, the local restaurant? Pump prices are especially aggravating in construction because workers must travel to jobsites, often long distances, every day to earn the money to pay for the travel. A viscous cycle. Contractors can relate, as well, since fuel is a major cost of running the equipment used to build the buildings to make the money to pay for the fuel.

Inflation, while part of the equation, is the most talked about aspect of rising prices. In the case of fuel, shortages caused by the Ukraine war and its Russian fuel embargo, along with global supply problems, are impacting supply while demand increases as people resume domestic travel, commuting, and generally resume life after COVID-19. A hidden cost is also the anticipation that today’s cost for fuel delivered to the station will be lower than that delivered next week. Prices at the pump often are set expecting the next shipment will be more costly so the price today should reflect that increase.

However, some fuel prices are going back down as supply stabilizes. The impact will not be quickly felt in all parts of the country as local dealers are still cautious about price fluctuations. And that goes for the suppliers of a variety of materials that are dependent on oil, like asphalt and roofing tar. Tracking the price movement is a job in itself and one that the AGC (Associated General Contractors of America) has taken on for a long time.

AGC publishes a variety of statistical reports on costs of doing business in construction and the employment market. Reading them monthly, comparing them across months and years, contractors can see trend lines and anticipate problems better than looking only at their local movement. Based on AGC reports over the past two months, thing are either getting better or worse, depending on your individual problems.

For example, in June, AGC noted that contractors’ bid prices for constructing new nonresidential buildings finally caught up, in May, with costs for the materials and service they buy. Association officials cautioned that contractors will still have a hard time keeping pace, however, with additional price spikes for many key construction materials. In other words, contractors were finally increasing their bids to compensate for the current increases in costs, but not high enough nor fast enough to meet future increases as anticipated based on trendlines in inflation in the May/June timeframe.

The producer price index for inputs to new nonresidential construction—the prices charged by goods producers and service providers such as distributors and transportation firms—rose 1.9% from April to May and 18.9% since May 2021, following 12 consecutive months of 20% or greater increases. An index for new nonresidential building construction—a measure of what contractors say they would charge to erect five types of nonresidential buildings—rose 0.4% for the month and 19.3% from a year earlier.

Again, in May, a wide variety of inputs accounted for the increase, making further increases likely in the near term. The price index for diesel fuel jumped 84.9% over 12 months. The index for liquid asphalt leaped 80.5%. The indexes for steel mill products and aluminum mill shapes climbed 32.9% and 31.2%, respectively. The index for architectural coatings such as paint soared 31.6%. There were increases of more than 20% in the indexes for plastic construction products, which rose 29.5%; truck transportation of freight, 25.8%; and gypsum building materials, 23.9%.

Meanwhile, total construction spending edged down 0.1% in May as spending on new houses and apartments stalled, while public and private nonresidential construction slumped based on federal spending data. Association officials said the construction industry’s capacity to build projects was being limited by workforce shortages and supply chain problems.

Construction spending, not adjusted for inflation, totaled $1.78 trillion at a seasonally adjusted annual rate in May, 0.1% below the upwardly revised April rate and 9.7% higher than in May 2021. Private nonresidential construction spending declined for the third month in a row, slipping 0.4% from April, although the May rate was 3.7% higher than in May 2021. Public construction spending decreased for the second-straight month, falling 0.8% from April and 2.7% from the year-ago rate.

By July, Association officials said that contractors are having to slow schedules and even turn down work because of challenges they are having finding workers and procuring materials needed for projects. They urged federal, state, and local leaders to boost funding for and to support new education and training programs that expose future workers to construction skills and opportunities. And they urged the Biden administration to remove tariffs and explore other ways to ease supply chain challenges.

The price of materials and services used in nonresidential construction jumped 1.1% in June, once again outpacing the rise in contractors’ bid prices. Association officials warned that rising materials prices were having an adverse impact on a growing number of construction projects that have suddenly become more expensive. AGC acknowledged that some materials prices had fallen but others appear headed for further increases.

Since the prices were collected, producers of gypsum, concrete, and other products have announced or implemented new increases. In addition, the supply chain remains fragile and persistent difficulties filling job openings mean construction costs are likely to remain elevated despite declines in some prices.

The producer price index for inputs to nonresidential construction–the prices charged by goods producers and service providers such as distributors and transportation firms—jumped 1.1% from May to June and 16.8% since June 2021. Meanwhile, the index for new nonresidential building construction—a measure of what contractors calculate they would charge to erect five types of nonresidential buildings—climbed by 0.5% from May to June and 19.8% over 12 months.

A diverse mix of inputs accounted for the increase in the cost index even as prices for several metal and wood products declined, the economist added. The price index for diesel fuel. For example, increased 14.1% in June, and more than doubled over 12 months, rising 111.1% since June 2021. The index for asphalt and tar roofing and siding products rose 3.2% in June and 22.2% over 12 months.

The downturn in nonresidential construction spending was widespread in June. The largest segment, power—comprising electric, oil, and gas projects—slipped 1.0% in May. Spending on commercial construction—warehouse, retail, and farm projects—declined 0.9%. Educational construction spending decreased 0.5%. Among the five largest segments, only manufacturing construction increased, by 1.2%, as work began or continued on numerous large factory projects.

As you can see, price fluctuation is hard to anticipate adequately. How much to increase prices now to compensate for expected price increase between now and the bid acceptance? Bid too low and the job can be yours, but will your company be able to complete the job—or go broke? Bid too high and a contractor willing to gamble might get the project. In response to the shortages, AGC called on the Biden administration to remove remaining tariffs on construction materials and do more to ease supply chain challenges impacting the availability of many different types of construction materials. 

And material cost is only one bid component. Do you have the right labor mix for the job? In fact, do you have the workers now, or in the pipeline, to do the job at all? Labor availability has been as confusing as material pricing. AGC reported in early July that contractors have the work, but they don’t have enough workers or materials to keep pace with strong demand for construction in many parts of the country.

Although construction added 13,000 jobs in June, the number of jobseekers with construction experience plunged to a record low for the month according to an analysis of federal employment data. Although nonresidential contractors were able to add employees in June, the industry needs more as demand for projects is outpacing the supply of workers. With industry unemployment at a record low for June and openings at an all-time high for May, it is clear contractors can’t fill all the positions they would like to.

The unemployment rate among jobseekers with construction experience tumbled from 7.5% in June 2021 to 3.7% in June 2022, the lowest rate for June in the 23-year history of the data. The number of unemployed construction workers fell by 345,000, or 47%, to 385,000, suggesting there are few experienced jobseekers left to hire.

Total construction employment moved up by 13,000 employees to 7,670,000 in June, as nonresidential gains offset the first decline in residential employment in 14 months. Nonresidential firms added 16,500 employees, including 600 at general building contractors, 11,400 at nonresidential specialty trade contractors, and 4,500 at heavy and civil engineering construction firms. Employment in residential construction—homebuilders, multifamily general contractors, and residential specialty trade contractors—dipped by 4,100.

Association officials said they were working to attract more people into the construction industry, launching a nationwide targeted digital advertising campaign, Construction is Essential, to identify and recruit new workers, including from segments of the population not typically involved in the industry. And they have launched a workforce retention campaign as well, called Culture of Care. Association officials also called on government officials to allow employers to sponsor more foreign-born workers and support more career and technical education to broaden opportunities for workers to gain construction skills.

In June, half the states—25—and the District of Columbia added construction jobs, 23 states lost jobs, and there was no change in Hawaii and West Virginia. Pennsylvania added the most construction jobs over the month (4,400 jobs, 1.7%), while California lost the most construction jobs in June (-6,100 jobs, -0.7%).

Association officials urged public leaders to continue investing in programs to inform and prepare workers about high-paying construction career opportunities. They said too few students and workers are even aware of the many opportunities that exist in the construction industry. And they pushed the Biden administration to remove remaining tariffs on construction materials and do more to ease supply chain challenges impacting the availability of many different types of construction materials.

Associations like AGC are the backbone of the construction industry, from the contractor side. Whether analyzing and reporting trends in materials and labor or lobbying government agencies—all the way up to the president—to act on the issues that impact construction, members and the general public are made aware of the serious impact these issues have on the industry.

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Inflation and Nonresidential Buildings