Industrial production jumps overall and for construction supplies; prices heat up

May 20, 2004
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Industrial production (IP) at factories, mines, and utilities advanced a strong 0.8% in April, seasonally adjusted, the Federal Reserve reported recently, after slipping 0.1% (initially estimated as -0.2%) in March. Factory production rose 0.7% in April, 0.1% in March (revised from 0), 1.1% in February, and 5.1% over the past 12 months.

Production of construction supplies jumped 1.1% in April. March and February gains were revised downward to 0.2% each from 0.6% and 0.5%, respectively. The 12-month gain was 5%. Overall capacity utilization rose to 76.9% in April from 76.5% in March. Manufacturing capacity utilization, a possible indicator of future demand for factory construction, rose to 75.7% from 75.2% but remained far below the 1972-2003 average of 80%.

The consumer price index for all urban consumers (CPI-U) moved up 0.2% in April, seasonally adjusted, and 2.3% over the 12 months since April 2003, the Bureau of Labor Statistics (BLS) reported. The CPI for urban wage earners and clerical workers (CPI-W), used to adjust many union wage contracts in construction and other industries, rose 2.1% over the 12-month span.

Real (net of change in the CPI-W) average weekly earnings of private-sector production or nonsupervisory workers were flat over the 12 months, as inflation matched the average hourly wage increase, and weekly hours were almost unchanged.

Average hourly earnings in construction rose by 1.6% over the 12 months, average weekly earnings rose by 2.1% (reflecting longer average workweeks), but real average weekly earnings inched up just 0.1%.

The report seems out of date already, however, given the huge jumps in energy prices since the April numbers were gathered. The price of West Texas Intermediate crude oil on the New York Mercantile Exchange recently closed at an all-time high of $41.08 per barrel. The Energy Information Administration (www.eia.doe.gov), which releases gasoline and diesel prices every Monday, reported little change in gasoline prices through April but a 10-cent jump from May 3 to 10, bringing the national average for all grades to a record $1.98, 14 cents higher than the April average.

The price of on-highway diesel fuel, which affects the CPI less but is a more important cost item for construction trucks, off-road equipment, and delivery charges, rose only 3 cents last week, to $1.74, but is likely to keep climbing in line with the rise in crude-oil prices.

Among intermediate goods, BLS noted: “Subsequent to a 1.4% increase in March, prices for materials and components for construction climbed 1.7% [for a 12-month increase of 7%]. In April, the index for millwork rose 2.2%, following a 0.5% gain in the previous month. Price increases for fabricated structural metal products, wiring devices, fabricated ferrous wire products, and steel mill products also gathered speed in April.

The index for plastic construction products rose, after showing no change in March. Prices for concrete products turned up in April. By contrast, a 1.8% increase in prices for plywood in April followed an 8.6% increase a month earlier. The indexes for nonferrous wire and cable, softwood lumber, and gypsum products also advanced less than they did in the preceding month.” The PPI for scrap iron and steel plunged 10% in April but was still up 74% over the past year, suggesting that the price of steel mill products, up 23% in 12 months and accelerating for the past seven, will rise further despite the recent downturn in scrap prices.

The PPI for cement has not risen much yet but AGC received reports early this week that prices were rising sharply in Texas and Florida. Supplies were reportedly nonexistent in southwest Florida and tight in parts of Texas, other Sunbelt states, California, and the Midwest. Reasons cited included strong demand, a drop in imported cement, and shortages of ships, railcars, and trucking, depending on the region. Articles in the Wall Street Journal last week discussed vacancy rates in different markets. Reis and Grubb & Ellis estimated little or no improvement in vacancy rates last quarter in industrial properties. Lloyd Lynford of Reis “says not to expect the vacancy rate to go down too much or rents to go up too much, mainly because construction completions are forecast to exceed absorption, meaning more available space.”

Marcus & Millichap ranked markets for retail properties. “Orange County [California], Washington, and San Diego were the top three markets in 2003, but this year Orange County beat out Washington, which had been in first place for the past two years. Orange County topped Washington in several areas…including construction completions as a share of total inventory….Manhattan moved up three spots to ninth place, in large part because…there is minimal new construction, says Bernard Haddigan” of Marcus & Millichap.

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