Rapid price increases for construction materials have slowed in recent months, but wage pressures and volatile energy markets could send those costs spiking again later this year, one economist warns.
“Construction cost increases slowed markedly in the last half of 2006, but the relief is likely to be short-lived and may have ended already,” Kenneth Simonson, chief economist for the Associated General Contractors of America, told AGC members gathered in San Antonio on March 22. “By the end of 2007, materials costs could be rising again at a 6% to 8% [annual] rate, with wages rising at a 5% pace.”
Construction is vulnerable to high price increases because the industry has little ability to avoid using materials that are in strong demand and for which supplies increase irregularly, Simonson said during a presentation at the AGC’s 88th annual convention. Simonson published his findings in the organization’s fourth semiannual Construction Inflation Alert, available at www.agc.org.
Why does price inflation for construction frequently outpace growth in consumer pricing? Simonson offers a dual explanation:
First, many of the prices tracked in the consumer price index don’t entail a materials cost. Services are a good example. For those products that do require materials, manufacturers are often able to substitute one material when another resource becomes too pricey.
Secondly, every material used in construction must be delivered to a job site, so transportation costs have a direct and immediate impact on those prices.
“Contractors report that fuel surcharges are more common than in the past,” Simonson said. “When transportation networks are stretched tight, fuel cost increases are likely to be passed along to customers.”
Simonson points to greater volatility in petroleum, concrete, and metals products which implies that highway and other heavy construction are more likely to experience large price jumps again than building construction segments. However, “even building construction is at risk of much higher materials cost increases than the general rate of inflation.”
Labor may contribute to the increased cost of development in this and subsequent years, too. From February 1997 to February 2007, the industry created one out of 10 new jobs in the economy — double the industry’s share of overall employment. Construction employment increased by nearly 2 million, or 33%, while total non-farm payroll employment rose one-third as fast, or 13%.
Demand for skilled craft workers, supervisors, estimators and managers is growing as the volume of nonresidential construction increases. However, low unemployment throughout the economy means there are fewer applicants to choose from, while more skilled construction workers are reaching retirement age.