Construction input prices fall slightly

Diving brief:

• Construction input prices fell slightly in September, although overall wholesale prices businesses receive for products rose more than expected, raising the odds that the Federal Reserve will continue to raise interest rates in its fight. against inflation.
• Building material costs fell 0.1%, according to Associated Builders and Contractors producer price index analysis data released Wednesday. But the overall PPI, which measures the wholesale prices companies receive for their products, rose 0.4% in September, double the 0.2% expected by analysts.
• In short, this is bad news for entrepreneurs. “The negative factors threatening the broader economy and non-residential construction are only getting stronger,” ABC’s chief economist Anirban Basu said in a statement. “For entrepreneurs, the bottom line is that they should actively prepare their respective balance sheets for a downturn, even though many businesses are currently operating at full capacity.”

Overview of the dive:

While any drop in building material prices is good news for contractors in 2022 – and September marked the third straight monthly decline – non-residential construction input prices are still up 15.9% from to a year ago and up 40.8% since the start 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 at this point in 2021.

The impacts of rising costs and tariffs have already dampened the residential construction market. Basu said there was growing evidence that the unease could spread to other areas of construction in the future.

“High inflation and interest rate increases have not only undone the momentum of the US residential construction industry, but are also threatening the entire global economy,” Basu said. “This is bad news for the heavily funded real estate and construction segments.”

Indeed, other economists have issued similar warnings for the broader real estate sector in light of the latest PPI figures.

“Higher construction prices make development projects less profitable for the builder and the investor,” Xander Snyder, senior economist at First American Financial Corporation, based in Santa Ana, Calif., said in an email to Dive build. “This situation is exacerbated by rising interest rates, which further compress potential margins for investors with higher funding costs. This combination makes it more difficult to start new construction projects.