Dive Brief:

• Both overall and nonresidential construction input prices tumbled 2.7% in December from the previous month, the largest monthly drop since April 2020, according to an Associated Builders and Contractors analysis.
• Despite that monthly drop, overall construction prices remain 7.9% higher than a year ago, while nonresidential construction input prices jumped 7.6% year over year, according to the report.
• Though the Producer Price Index shows improvement on the inflation front, the decline in input prices may be a double-edged sword as a sign of spreading economic weakness, according to Anirban Basu, ABC chief economist.

Dive Insight:

December’s reading represents the smallest yearly increase since January 2021, according to ABC.

“Recent consumer and Producer Price releases indicate that inflation is fading, though it remains well above the Federal Reserve’s 2% target,” said Basu in the report. “Should inflation continue to abate, the Federal Reserve may be able to stop increasing interest rates sooner than anticipated. Interest rate-sensitive segments like real estate and construction would be among the primary beneficiaries.”

Yet Basu said the drop in input prices is “both good and bad news.”

That’s because a decline may also be an omen for economic weakness, said Basu. 

“There could be bad news on inflation in the months ahead. War continues in Eastern Europe and the commodity use-intensive Chinese economy is in the process of reopening,” said Basu in the report. “Though there is evidence of improving supply chain functioning and moderation in input prices, contractors should not be tempted into complacency.”

Contractors listed material costs among their top concerns in a recent survey, evidence that any relief may be short lived, said Ken Simonson, chief economist at the Associated General Contractors of America.

“Some prices have already turned higher in January,” Simonson said. “Contractors are right to rank materials costs as a major concern for 2023.” 

For example, steel producers have sharply raised prices in recent weeks for hot-rolled coil, Simonson said, while producers of insulation and tile have already announced price increases for February. In addition, recent spikes in futures prices on commodities markets for copper and aluminum may signal higher costs for these products soon, he said.

But for the moment, monthly declines are a welcome sign that the worst of pandemic-era inflation may be slowing. 

Crude petroleum prices fell sharply in December by 14.9%, while natural gas prices jumped 45.3%. Over the year, iron and steel prices declined 24.4%, while concrete products surged 14.8%, according to the report.

At the same time, contractors are currently maintaining their longest backlog since 2019, according to ABC’s construction backlog indicator, said Basu, another positive.