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AGC's Data DIGest: July 11 – July 15, 2013

freightPrices for materials, construction flatten or dip in June; freight costs may rise soon

Editor’s note:  Construction Citizen is proud to partner with AGC America to bring you AGC Chief Economist Ken Simonson's Data DIGest. Check back each week to get Ken's expert analysis of what's happening in our industry.

Click here to view June PPI table.

The producer price index (PPI) for finished goods climbed 0.3%, not seasonally adjusted (0.8%, seasonally adjusted), in June and 2.5% over 12 months, the Bureau of Labor Statistics (BLS) reported on Friday. The PPI for inputs to construction—a weighted average of the cost of all materials used in construction plus items consumed by contractors such as diesel fuel—slipped 0.1% for the month and rose just 1.5% year-over-year. The PPI for residential construction inputs fell 0.2% in June and was up 1.9% from a year earlier; and for nonresidential construction, 0 and 1.2%. Most major construction inputs dipped in price in June: steel mill products, -0.7% for the month and -8.1% over 12 months; copper and brass mill shapes, -0.5% and -3.8%; aluminum mill shapes, -0.1% and -2.5%; diesel fuel -0.6% and 3.6%; and concrete products, -0.1% and 3.1%. Previously fast-rising gypsum products prices retreated 0.2% (but rose 16% from June 2012), while lumber and plywood dropped 3.3% (+9.9% over 12 months). PPIs for contractors’ services were subdued. The PPI for new health care construction was flat for the month and up 0.5% since its introduction in June 2012; new schools, 0.1% and 0.5%; new offices, -0.3% and 0.8%; new industrial buildings, 0.1% and 1.6%; and new warehouses, 0 and 2.7%. The PPI for new, repair and maintenance work on nonresidential buildings by electrical contractors rose 0.1% and 0.3%. The indexes for concrete and plumbing contractors were both flat in June and up 1.3% from a year ago; and roofing contractors, -0.1% and 2.6%.

Lumber prices climbed “to nine-year highs in early April only to plunge faster and deeper in three months than they rose in the previous ten, lumber executives say,” Econoplay.com reported on Wednesday. “Now, in early July, prices finally inched up from a bottom though they’re still hovering near a 52-week low. Random Length’s monthly composite price for framing lumber shows May at $329 per thousand board feet, a dollar below the year-ago price—but a steep fall from the $437 peak in April. The weekly price did inch up $3 after Fourth of July mill closures. All this says more about the emotional trajectory of speculators (who ran lumber prices far higher than they deserved to be) than the trajectory of the housing recovery (which failed to meet overly optimistic near-term forecasts but remains on a firm path). [It appears] that speculators went wild and then panicked, thus exaggerating the seasonal pricing cycle that happens almost every year….When consensus forecasts at the start of the year called for 1.1 million to 1.3 million starts,…builders soon found they couldn’t meet that demand as they ran into shortages of materials, land and labor. And along the way they fortuitously discovered there was money to be made in not building—that an undersupplied market could stoke demand and raise prices….China added to the price run-up by re-entering the market after staying away last year to tamp down its housing bubble. (Nobody could confirm if China also had a hand in bidding down lumber prices these last three months, but odds are that it did.)”

“Most carriers in all sectors have reported strong downward pressure on [freight] rates and competition in the intermodal arena remains strong,” according to the June issue of the Cass Freight Index Report. “That being said, the hours-of-service rules, which went into effect July 1 and will have the immediate effect of reducing the productivity of existing capacity by an average of 5%, could change all of that. If trucking capacity gets scarce, and it will, then the initial beneficiary will be intermodal loadings. As trucking rates rise, rates for other competitive modes—especially intermodal—will also increase…. truck shortages will begin to manifest as we enter the traditional holiday shipping period, pushing up rates.” The new rules and scarcity of drivers are likely to raise contractors’ freight costs, especially where oil and gas drillers are competing for drivers.

“CoStar Group projects that nearly 70 million square feet of new retail space will be delivered next year,” the Wall Street Journal reported on July 3. “But Suzanne Mulvee, CoStar’s director of research—retail, doesn’t foresee a glut. ‘You’re still less than half of what we were doing,’ she said.” Many landlords facing “competition from internet-based retailers…are responding by adding tenants who sell goods and services not easily delivered online.” Citing an analysis by RBC Capital Markets, the online CoStar Watch List Newsletter reported today, “Demand from retailers, as evidenced by planned store openings, continues to grow while plans for new supply, either among regional malls or community centers, remains subdued with little uptick in planned deliveries in sight.” Store openings planned by retailers in RBC’s database over the next 24 and 12 months “are five-year highs and represent year-to-date increases of 2.1% and 2.8%, respectively, according to RBC, which based its outlook [on] more than 50 meetings with retailers and retail landlords….National tenants, especially franchises, continue to scoop up vacancy among spaces of 5,000 square feet and smaller. At the same time, large box users are struggling to find sufficient space to satisfy planned store openings, RBC noted. The trend toward smaller footprints among retailers continues, although the trend among retailers downsizing existing stores appears to have moderated. There also appears to be very little retailer distress on the horizon, suggesting that recent increases in occupancies and rents will likely continue.”

The Data DIGest is a weekly summary of economic news; items most relevant to construction are in italics. All rights reserved. Sign up at www.agc.org/datadigest.

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