Dive Brief:

• Construction input prices nudged down slightly in September, though the overall wholesale prices businesses receive for products rose more than expected, increasing chances that the Federal Reserve will continue to hike interest rates in its battle against inflation.
• Costs for construction materials fell 0.1%, according to an Associated Builders and Contractors analysis of producer price index data released Wednesday. But the overall PPI, which measures wholesale prices businesses receive for their products, rose 0.4% in September, double the 0.2% analysts were expecting.
• In sum, that’s bad news for contractors. “Negative factors threatening the broader economy and nonresidential construction are only getting stronger,” said Anirban Basu, ABC’s chief economist, in a statement. “For contractors, the upshot is that they should be actively preparing their respective balance sheets for a downturn, even as many firms presently operate at capacity.”

Dive Insight:

While any drop in construction material prices is welcome news for contractors in 2022 — and September marked the third consecutive monthly dip — nonresidential construction input prices are still up 15.9% from a year ago, and 40.8% since the beginning of the pandemic, with natural gas and unprocessed energy seeing triple digit gains.   

Roofing products continue to see high costs, up 15.3% from a year ago, while lumber, despite falling from its highs, still costs 14.5% more than it did at this point in 2021.

The impacts of rising costs and rates have already put the brakes on the residential homebuilding market. Basu said there’s mounting evidence that malaise could spread to other areas of construction going forward.

“Elevated inflation and interest rate increases have not only undone momentum in America’s homebuilding industry but also threaten the entire global economy,” Basu said. “This is bad news for the heavily financed real estate and construction segments.”

Indeed, other economists sounded similar warnings for the broader real estate sector in light of the latest PPI numbers.

“Higher construction prices make fewer development projects profitable for both builder and investor,” said Xander Snyder, a senior economist at Santa Ana, California-based First American Financial Corporation, in an email to Construction Dive. “This is exacerbated by increasing interest rates, which further squeeze investors’ potential margins with higher financing costs. This combination is making it more difficult to begin new construction projects.”