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Construction costs cool but still outstrip overall CPI, PPI; housing, hotels stay hot
May 20, 2005

By Ken Simonson
May 20, 2005
Inflation reports this week showed mixed messages for both consumer and producer prices, including construction materials. On Wednesday, the Bureau of Labor Statistics (BLS) reported that the consumer price index for all urban consumers (CPI-U) rose 0.5% in April, seasonally adjusted, and 3.5% for the 12 months since April 2004. Yet the “core” index, which omits energy and food costs, was unchanged for the month and rose only 2.2% over the 12-month span. The CPI for urban wage earners and clerical workers (CPI-W), which is used to adjust many labor contracts in construction and other industries, rose 3.7% since April 2004.

The producer price index (PPI) for finished goods moved up 0.6% in April, seasonally adjusted, and 4.8% over 12 months, BLS reported on Tuesday. The PPI for materials and components for construction fell 0.1% for the month and slowed to a 6.4% rise over the past 12 months. Earlier in the year, the 12-month increase for construction materials had been more than 10%. BLS noted, “Prices for building paper and board dropped 6.8% in April, after rising 2.9% a month earlier. The indexes for fabricated structural metal products, asphalt felts and coatings, softwood lumber, and millwork also moved down, following advances in March. Prices for plastic construction products, concrete products, and nonferrous wire and cable climbed at slower rates than they did in the prior month. Conversely, the steel mill products index declined 1.8% in April, compared with a 3.2% decrease in March. Prices for metal valves (except fluid power), paving mixtures and blocks, and cement moved up, after falling in the preceding month.” The PPI for construction machinery and equipment rose 0.1% for the month and 6% over 12 months. The index for crude materials for construction, an indicator of possible future materials cost increases, rose 0.9% in April and 6.1% over 12 months. One steel supplier reported to AGC that it had been notified of a $10-per-ton increase for May 1, followed on May 10 by an announcement of a $30-per-ton decrease, effective immediately.

Housing starts and building permits rebounded in April, the Census Bureau reported on Tuesday. Housing starts increased 11% at a seasonally adjusted annual rate overall, 6% for single-unit starts, and 35% for multi-unit starts. Both types of starts were up 5% in the first four months of 2005 compared to the same months of 2004. Permits, a reliable indicator of near-term construction, rose 5% for both single- and multi-unit housing. Compared to January-April 2004, single-unit permits in the first four months of 2005 were level and multi-unit permits were up 10%.

“The hotel industry will start construction on more rooms this year than in any year since 2000,” the Wall Street Journal reported on Tuesday, citing a study by PricewaterhouseCoopers that projected a 21.5% rise in room starts to 98,000 rooms. “Developers are disproportionately breaking ground on [high-end hotels, which make up] 22.5% of current room supply but 30.5% of the rooms starting construction this year.”

“Lifestyle centers,” open-air shopping centers that are smaller than malls, more upscale than strip malls, and lack department-store anchors, are a hot retail construction category, the Journal reported on Wednesday. “There are 132 lifestyle centers open in the U.S. with 42 more in the pipeline, according to a survey by Colliers International, a commercial real-estate services firm. By contrast, few if any enclosed malls are being built. The lifestyle centers in development will average 500,000 square feet, about a third bigger than the ones already built, according to Colliers. The centers are concentrated in the South and West where weather is warmer, but Colliers reports that two-thirds of the ones in development are in the Northeast and Midwest.”

Mixed reports appeared regarding manufacturing. On Tuesday, the Federal Reserve Board reported that the industrial production index for manufacturing was unchanged in April, seasonally adjusted, after falling 0.3% in March (revised from an initial estimate of -0.1%) and rising 0.5% in February (revised from 0.3%). Over the past 12 months, overall manufacturing production rose 3.5% but output of consumer goods was up just 1.4%, while business supplies climbed 8.4% The index for construction supplies rose 0.5% in April, 0.1% in March, 0.9% in February, and 3.4% for the past 12 months. Deere & Co. announced on Tuesday that its February-April construction equipment sales rose 28% from a year earlier and that it projects “strong construction and farm economies [will help] to push overall sales up 9-11%” in the fiscal year ending October 31, the Journal reported on Wednesday. Less positively, the Journal reported this week: separate surveys by the Federal Reserve Banks of New York and Philadelphia showed manufacturing in their regions (New York, New Jersey, Delaware, and eastern Pennsylvania) slowed; Interstate Bakeries announced it would close another bakery, depots, and thrift stores in the Northeast; Springs Industries said it would move production of window shades and blinds from Reno to Mexico; and General Electric said last month it would move production of “a line of midtier refrigerators” from Bloomington, Indiana, to Mexico.

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Chief Economist, Associated General Contractors of America 703-837-5313; fax -5406; www.agc.org

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