Material prices back on the rise

Dive Brief:

After recording their biggest drop in over two years, overall construction and nonresidential input prices whipsawed upwards again in January, increasing 1.3% and 1.1% respectively, according to an Associated Builders and Contractors report.
Both categories are 4.9% higher than a year ago. The jump in overall construction input prices reflected the smallest annual increase since January 2021, according to the report, but stymied progress made in December, when prices plunged 2.7%, the largest drop since April 2020.
“Recent employment and retail sales reports indicate that the economy is not slowing nearly as quickly as predicted. That is the good news,” said Anirban Basu, ABC chief economist. “The bad news is that the economy remains overheated, a phenomenon neatly reflected in the January PPI data, which indicated that construction input price gains accelerated on a monthly basis.”

Dive Insight:

After December’s numbers posted lower results, Ken Simonson, chief economist at the Associated General Contractors of America, warned that lower costs could be short-lived.

“Some prices have already turned higher in January,” Simonson said last month. “Contractors are right to rank materials costs as a major concern for 2023.” The latest report seemed to lend credence to that warning.

An elevated producer price index is another indicator the Federal Reserve will maintain higher interest rates longer, said Basu.

For example, inputs to nonresidential construction and commercial construction remain 37.9% and 38.2% higher than February 2020. Commodities such as iron and steel remain 55.9% higher since February 2020, while other widely used materials such as concrete products also remain 27.9% higher compared to the start of the pandemic.

But many nonresidential contractors will feel little to no effect from higher interest rates in 2023, Basu said. That’s because, despite a slight tick down in January, industry backlog remains one month higher than in January 2022, and right around the same level of February 2020.

“Ironically, it is the current strength of the economy that makes a recession more likely sometime during the next 12 months,” said Basu. “At some point, higher interest rates will meaningfully affect economic activity.”