Consumer inflation strengthened once again in May, with the overall index up 0.4% over the previous month and 4.2% over the full year that ended in May, the Dept. of Labor reported this week. Excluding food and energy, known as core consumer prices, core inflation rose 0.3%, indicating that high energy costs are passing through to a broad array of goods and services.
This pass-through is affecting some industries more than others—particularly the freight-heavy construction sector. The Associated General Contractors of America (AGC) is warning the construction industry to expect material price increases to consistently outpace that of overall inflation.
While producer prices increased 0.2% in May and 1.5% excluding food and energy in the past year, construction material and component prices jumped 1.5% and 7.8%, respectively, said Ken Simonson, AGC chief economist.
“In the last 12 months, there have been increases of 87% for copper and brass mill shapes, 48% for asphalt, 40% for diesel fuel, 26% for gypsum products, 18% for plastic construction products and 15% for cement,” Simonson said.
Simonson expects inflation pressure on construction material costs to lessen as the housing market cools. Federal data on new home starts is slated for next week, but the most recent April data showed a 5.4% drop month over month.
With higher operating costs, contractors that don’t account for sharp inflation will see some damage to their profit margins, Simonson told FleetOwner. Construction material costs have been mostly driven by U.S. and world demand for materials and ballooning transportation rates, Simonson added. That will keep inflation rates for construction costs higher than overall producer price increases.
New home sales in April grew 4.9%, but were 5.7% below that of April 2005. The annual rate of construction spending in April dipped 0.1% below that of March. For the first four months of the year, actual construction spending totaled $349.3 billion—8.9% above the same period last year.
“The non-residential construction market has been growing faster than that,” Simonson told FleetOwner. “The numbers have to be discounted somewhat because they have not been deflated to take in account these price increases. But construction employment was 3.5% higher in May 2006 than May 2005 indicating more construction activity.
“In terms of volume of construction activity and building materials, I would say nonresidential construction is still on the upswing,” Simonson continued. “Many segments have been constructing more buildings. I expect truckers hauling for the construction industry will have more work to do. Factory construction has been going up at a 20% annual rate, with similar growth for hospital construction and some categories of retail. There’s also good growth in hotel and resort and school construction.”
Based on May’s inflationary data, economists and Wall Street expect the Federal Reserve to continue tightening the supply of cheap money by raising the rate of the federal fund to 5.25% from the current 5% when it meets later this month. Generally, higher rates have a dampening effect on economic growth, especially on the housing market as consumers shy away from applying for large mortgages.
But fortunately the construction industry is well insulated from high interest rates, Simonson said, with the exception of single and multi-family housing. “Public construction such as school buildings or highways are independent of interest rates, as are hospitals and factories to some extent,” he said.
This in turn, will sustain busy freight traffic for construction materials.