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Construction costs hold steady in July, but economists warn increases could easily come back

July brought a break in a year marked by fast-rising construction-materials prices, but economists warned trade disputes could cause costs to begin rising quickly again.

An analysis of Bureau of Labor Statistics data found the cost of construction inputs was unchanged from June to July, but rose 8.1 percent year-over-year. Meanwhile, a separate analysis by the Associated Builders and Contractors, another construction-trade group, reach a similar conclusion.

Both trade groups warn that, despite the current reprieve, strong demand for new projects coupled with the new tariffs on steel, aluminum and lumber could easily start pushing prices up quickly again.

“Although price changes for construction materials in July were mixed, contractors are likely to be hit with additional cost increases as new tariffs take hold and stocks of items purchased before the tariffs are used up,” said Ken Simonson, AGC chief economist. “Despite the pause in cost increases in July, prices for goods and services used in construction rose over the past year at more than double the rate that contractors have raised their bid prices to put up new buildings.”

Even with prices stabilizing in July, year-over-year cost increases have eaten into many contractors’ bottom lines, according to AGC’s analysis. The trade group found that although materials costs increased 8.1 percent year-over-year, an index that measures how much firms charge to build nonresidential buildings rose only 3.3 percent in the same period, suggesting companies are absorbing more costs than they are passing on to developers.

Here’s what happened between July 2017 and July this year for varous common construction materials:

Diesel fuel, metals and wood products were the biggest contributors to the large year-over-year cost increases, Simonson said. He pointed out that from July 2017 to July 2018, there were producer price index increases of

  • 43.6 percent for diesel fuel;
  • 17.8 percent for aluminum mill shapes;
  • 12.4 percent for steel mill products; and
  • 16.3 percent for lumber and wood plywood
  • 8.2 percent for truck transportation and freight

Anirban Basu, chief economist at the ABC, said July’s apparent lag in cost increases could be the result of a “statistical aberration” and isn’t necessarily a sign that the surge in materials costs is coming to an end.

“Given the ongoing strength of the U.S. construction sector and ongoing trade tussles, it would be difficult to conclude that the rise in materials prices is over,” Basu said. “It may be the case, however, that the pace of increase in materials prices is set to slow as suppliers ramp up production of key inputs in the wake of higher prices and as the U.S. dollar remains strong. In any case, it is far too early for estimators, chief financial officers and others to conclude that the construction input inflation cycle is over.”

Meanwhile, AGC officials said U.S. tariffs on steel, aluminum and lumber imports and retaliatory tariffs are continuing to strain construction firms.

“Measures to help domestic steel and aluminum producers should not come at the expense of the many users of their products,” said Stephen E. Sandherr, the association’s chief executive officer.

About Nate Beck, nbeck@dailyreporter.com

Nate Beck is The Daily Reporter's construction staff writer. He can be reached at (414) 225-1814 (office) or 414-388-5635 (mobile).

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