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AGC's Data DIGest: June 11-17, 2019

'Bid price' PPI tops input cost growth in May; starts slump, ConstructConnect says

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.

Contractors' bid prices dipped in May, while materials and service input costs were flat for the month, based on the latest producer price indexes (PPIs). The PPI for new nonresidential building construction—a measure of the price that contractors say they would charge to build a fixed set of buildings—slipped 0.1% for the month but increased by 5.4% year-over-year (y/y) from May 2018, the Bureau of Labor Statistics (BLS) reported on Tuesday. Increases ranged from 4.2% y/y for health care buildings to 4.6% for new office construction, 5.0% for warehouses, 6.6% for schools and 6.9% for industrial buildings. Increases in PPIs for subcontractors' new, repair and maintenance work on nonresidential buildings ranged from 2.1% y/y for roofing contractors to 5.3% for electrical contractors, 5.9% for plumbing contractors and 7.8% for concrete contractors. In contrast to these output prices, the PPI for inputs to construction—excluding capital investment, labor and imports—was flat for the month and increased 1.3% y/y, a sharp deceleration from the 7.2% increase one year earlier and the smallest y/y gain since late 2016. This index covers both goods (56%) and services (44%). The PPI for energy inputs to construction slid 4.5% y/y. The PPI for nonenergy goods inputs rose 1.7% y/y; the index for services inputs increased 2.2% y/y. Price increases turned negative for some previously fast-rising inputs such as diesel fuel (down 6.2% y/y, following a 44% jump a year earlier) and cooled off for others, such steel mill products (up 1.1% y/y, following a 9.5% gain). Additional inputs important to construction that had large one- or 12-month price changes include architectural coatings, up 2.4% for the month and 8.1% y/y; construction machinery and equipment, 0.1% and 5.8%, respectively; asphalt felts and coatings, 1.0% and 5.6%; aluminum mill shapes, -0.9% and -5.0%; gypsum products, -2.6% and -6.3%; and lumber and plywood, -0.9% and -14%. AGC posted tables and an explanation of PPIs.Readers are invited to send information on price changes and delivery issues to simonsonk@agc.org.

Construction data firm ConstructConnect reported on Thursday that the value of nonresidential starts in 2019 declined 5.9% y/y from May 2018, not seasonally adjusted. The decrease "originated in commercial (-30.4%) and institutional (-14.3%), while industrial remained the same (+0.1%) and heavy engineering/civil perked up by [22%]. The year-to-date total nonresidential starts decrease of -10.6% [for January-May compared to January-May 2018] was caused by drops in commercial (-19.2%), engineering (-13.1%) and institutional (-9.7%)." The value of residential starts tumbled 13% y/y and year-to-date.

"Factories have shifted into low gear after a year of record output and big job gains," the Wall Street Journal reported on Thursday. "American consumers and companies are buying fewer cars, trucks and tractors and building fewer houses. That, in turn, is weighing on demand for wheels and steel parts, washing machines and paint." These cutbacks are likely to reduce demand for manufacturing structures. The Census Bureau reported on June 3 that the year-to-date value of manufacturing structures put in place January-April was up 11% from January-April 2018 but spending at a seasonally adjusted annual rate fell 7% from March to April. Readers are invited to send information about project delays or cancellations to simonsonk@agc.org

However, construction related to U.S. oil and gas production is proceeding. "ExxonMobil and SABIC are proposing to build the world's largest ethane steam cracker near the Gulf community of Portland," Texas, the Houston Chronicle reported on Friday. "A day after receiving permitting approvals from state officials, Exxon Mobil said Thursday its joint venture with SABIC...would proceed with construction on the $10 billion project." In addition, ConstructConnect noted that its May starts total "included one $10 billion project, [a liquefied natural gas] export terminal to be built...near Port Arthur, Texas."

Combined public and private office construction spending set new records in March and April at a seasonally adjusted annual rate, Census reported on June 3, and public office construction jumped 17% year-to-date through April. "California state government has launched a historic building boom in Sacramento, scheduling roughly $3.4 billion worth of new construction and renovations over the next five years with more to follow," the Sacramento Bee reported today. "'Something like this—this amount of square footage, this amount of resources, this amount of comprehensive refresh—I think is unprecedented,'" said Jason Kenney,...deputy director of the Department of General Services' Real Estate Division."

"Demand and supply growth are in equilibrium balance in more markets and property types than ever before," Glenn Mueller wrote in his latest "Real Estate Market Cycle Monitor," issued on June 4, which analyzes occupancy and rents for office, industrial (warehouse), apartment, retail and hotel properties in 54 metro areas. The only property type not in "expansion phase" nationally (characterized by declining vacancy despite new construction) is apartments, which he deemed to be in an early stage of "hypersupply" (increasing vacancy and new construction), although there was variation among metros. He noted, "Continued GDP and employment growth are driving moderate office demand growth. [WeWork and other flex rental companies have] become the favored option for start-up companies and large firm expansions....Expansion for internet fulfillment delivery by many retailers continues to be the top driving force in [warehousedemand. We also see more demand in secondary markets for internet fulfillment and last mile delivery strategies. [Net retail] supply growth was again moderate as non-functional space was converted to other uses and new concept space construction in good locations was moderate. More internet retailers are opening bricks and mortar stores to compete and have a location for both last mile pickups and returns to reduce their shipping costs. Downtown retail is doing well as millennials have chosen to live downtown."

Data DIGest is a weekly summary of economic news. All rights reserved. Sign up at http://store.agc.org. Editor: Ken Simonson, Chief Economist, AGC, simonsonk@agc.org.