Higher prices for construction materials and nonresidential construction will squeeze margins for construction companies despite an overall improving construction outlook, Associated General Contractors said.
AGC’s analysis of federal data on producer prices concluded that construction prices increased more than overall prices for “final demand” in January.
“Although contractors on average were able to raise bid prices in line with materials cost increases, the results varied widely by commodity, building type and specialty trade,” said Ken Simonson, the association’s chief economist. “Several key construction materials, or ‘processed goods,’ experienced substantial price increases that in many cases exceeded what contractors could pass on [in January]. It will take a few more months to see if these costs increases are sustained—putting a squeeze on contractors’ margins—or a one-time blip.”
Increases in prices for gypsum, lumber and plywood, cement, insulation materials, and copper and steel products drove the increase in construction producer prices, Simonson said. A 1.9% drop in the price of diesel in January helped offset the increases, he noted.
AGC said that many firms report competition remains fierce for many projects and that it will take more sustained growth in demand before firms are able to significantly increase what they charge.
“Despite growing construction employment and increasing private-sector demand for construction, market conditions remain quite tough for most firms,” said Stephen Sandherr, the association’s chief executive officer. “Getting Congress to act on vital infrastructure measures like federal transportation and water resources bills will help improve market conditions for many construction employers.”
In a related note, both housing starts and permits for new housing fell in January, according to the Department of Commerce. Housing starts fell 16%, to 880,000 from 1.04 million in December, the largest monthly decline since February 2011. The harsh winter weather across much of the country was cited as a likely factor.
Despite the slowdown, supply and demand for housing will continue to increase, said Lindsey Piegza, chief economist with Sterne Agee, Birmingham, Ala.
“The recent pullback in demand has not undermined the housing recovery but slowed the pace of activity,” she said.
