San Antonio—“Construction cost increases slowed markedly in the last half of 2006. But the relief is likely to be short-lived and may have ended already,” said Kenneth Simonson, chief economist for the Associated General Contractors of America (鶹ý), while speaking at the association’s 88th Annual Convention in San Antonio, Texas. “By the end of 2007, materials costs could be rising again at a 6-to-8 percent rate, with wages rising at a 5 percent pace.”
In 鶹ý’s fourth Construction Inflation Alert (CIA) released today, Simonson explained that construction is vulnerable to high price increases because the industry has little ability to avoid using materials that are in strong demand and for which supplies increase irregularly.
Simonson points to greater volatility in petroleum, concrete, and metals products which implies that highway and other heavy construction are more likely to experience large price jumps again than are building construction segments. But, he warns, “even building construction is at risk of much higher materials cost increases than the general rate of inflation.”
Over the long-term, two factors distinguish construction costs from the costs facing consumers or most other industries. First, the consumer price index (CPI) includes large amounts of services and goods for which materials are not a significant share of the costs, or for which substitution among materials is possible. Second, every material used in construction must be physically delivered.
“Contractors report that fuel surcharges are more common than in the past,” noted Simonson. “Because when transportation networks are stretched tight, fuel cost increases are likely to be passed along to customers.”
In terms of labor, Simonson believes, “the industry also may be entering an era of accelerating wage and salary costs.” From February 1997 to February 2007, the industry created one out of 10 new jobs in the economy, double the industry’s share of overall employment. Construction employment increased by nearly 2 million, or 33 percent, while total non-farm payroll employment rose barely one-third as fast, or 13 percent.
Demand for skilled craft workers, supervisors, estimators and managers is growing as the volume of nonresidential construction increases. However, low unemployment throughout the economy means there are fewer applicants to choose from while more skilled construction workers are reaching retirement age.
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