Nonresidential and Residential Construction Materials Price Inflation Diverge


Prices for inputs used in nonresidential construction fell for the second month in a row, reports Reed Construction Data’s chief economist Bernard M. Markstein.  Behind the decline include drops in copper, steel, and oil prices. Residential construction benefits from the drop in these input prices. However, sharp jumps in prices for lumber, plywood, and oriented strand board (OSB) have offset these declines, leaving the weighted average for the price of materials used in residential construction higher.

The drop in prices for copper and steel are due to lower demand due to recession in Europe and a slowdown in U.S. nonresidential construction activity. Oil prices are down due to rising U.S. oil production. Also, high oil prices relative to natural gas prices have encouraged a shift in demand from oil to natural gas.

The increase in residential construction activity has increased demand for materials used in residential construction. However, the long period of minimal residential construction activity and the resulting slump in demand for residential construction materials led to many producers of these products (lumber, plywood, and OSB in particular) closing production facilities. Smaller (Mom and Pop) operations often simply went out of business (this was especially true for sawmills).

With limited supply and rising demand, prices for many of these materials have spiked. Higher prices are encouraging the reopening of shuttered plants and revitalization of expansion plans shelved during the residential construction recession (depression). As these plants come on line, prices will fall, but it will take time to reconstitute the old supply structure. Further, producers are cautious about expansion having suffered significant losses over the past few years.

Over the course of this year, expect nonresidential building materials prices to rise moderately in the second half of this year. Prices for residential building materials should flatten and drop a bit in the second half of the year. Stronger than expected growth would result in higher building materials price inflation. Lower than expected growth would put downward pressure on building materials prices.

Outlook for Construction Materials Prices

The U.S. economy is growing at a barely acceptable pace. Sequestration (a total of $85 billion of across the board cuts for federal spending), the need to provide funding for the federal government beyond the end of the current fiscal year on September 30, and the approaching federal debt ceiling in the fall are major challenges for the economy. Meanwhile, Europe is in recession, reducing demand for imports from the United States.

Despite these and other economic risks, the Reed Construction Data forecast is that the United States economy continues to grow at a moderate pace. The forecast is for nonresidential construction activity to turn in modest growth this year and show more strength next year. Along with continued expansion of the residential sector, this will create moderate upward pressure on construction materials prices. Recent spikes in building materials prices for products used mainly in residential construction will flatten. In several cases these prices will decline somewhat as supply ramps up and supply bottlenecks are eliminated. The outlook is for 2013 building materials prices to rise at roughly the same pace as or slightly lower than overall inflation.

If the U.S. economy exceeds our forecast of real (inflation-adjusted) gross domestic product (GDP) growth of 2.1% for the year, there will be increased construction activity and greater increases in materials prices. Faster growth in the rest of the world would also mean higher construction materials price inflation. Significantly higher energy prices for a sustained period would contribute to a greater rate of building materials price inflation.  Read More.