Construction Materials Price Inflation Rose 0.3% in July After a Small DIP in June

Construction materials price inflation rose 0.3% in July after a small DIP in June due to lower energy prices and a decline in the pace of economic growth.The index is 8.9% higher than a year ago.The 7.1% increase in copper pipe and tube prices was the only significant price rise in July.The small rise in the overall index was driven by the delayed pass through of earlier metal and energy price increases to metal and petrochemical products.Some of the 0.3% monthly price increase was due to the pickup in manufacturing production with resumed orders from Japan as well as available Japanese parts to make products for the US market as Japan continued its recovery from the earthquake and tsunami earlier this year.Manufacturing uses many of the same materials as construction. Both of these price drivers will be exhausted early in the summer.Pricing will then be dominated by the worldwide slowdown in economic growth early in 2011 and the generous surpluses of both production capacity and reserve labor.A briefly stronger U.S.Dollar in response to the Euro debt crisis will also contribute to softening commodity prices for US buyers.The pricing environment will be weak for materials suppliers for the rest of 2011.Little change in the price index is expected, with a few monthly price declines possible.Pricing weakness will extend into 2012 if GDP growth does not rebound to near 2% in the second half of this year. Low inflation for commodities, and hence construction materials costs, in the second half of 2011 is an interruption of the longer-term trend for commodity prices to rise faster than overall inflation during the mature phase of an economic recovery.The low inflation window will close a few months after world economic growth turns about from the current very low pace to near an average (3% plus) rate.The earliest that this could happen is September or October but there is a high risk of delay until the excess deficit problems in both the US and Europe are contained by implementing spending cuts with immediate effect.Contractors should expect a two or more quarter window with their materials cost rising the same or less than overall inflation. Note recent price declines in the most economically sensitive materials where prices are set largely in domestic markets _ softwood lumber, softwood plywood, gypsum products and concrete products.The end of the low inflation window will be signaled by persistent price rises for these products.However, with the exception of concrete, housing is the main driver of demand for these materials.With housing construction likely to post only modest gains over the next twelve months, these prices are likely to remain soft even as producers look for opportunities to raise prices.A sharper rebound in single-family construction will send these materials prices higher faster. Although residential construction contributes to demand for concrete, commercial construction projects often are a more important determinant of demand.With commercial construction projected to show stronger growth than overall economic growth and multifamily housing providing what little growth in residential construction that is occurring or likely to occur in coming months, cement and concrete prices are most likely to be the first to move upward.Only continued sub-PAR economic growth or a recession would restrain these prices _ an outcome no one wants. Source: Reed Construction Data