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Producer Price Index Year-to-date thru June 2020

7-14-20

Producer Price Index selected items year-to-date through June 2020. All values compare most recent June pricing to December 2019. Pricing represents 6-month change, not annualized change.

  • -2.5%  Inputs to new nonresidential construction
  • -0.9%  Inputs to new residential construction

 

  • +1.0%  Final demand construction
  • -0.4%  New Warehouse Bldg
  • +1.2% New School Bldg
  • +0.7% New Office Bldg
  • +1.4% New Industrial Bldg
  • +1.4% New Healthcare Bldg

 

  • New work on nonresidential buildings
  • +0.7% Concrete contractors
  • +1.8% Roofing contractors
  • +1.4% Electrical contractors
  • +1.2% Plumbing contractors

 

  • Selected Material Inputs
  • -42.0% #2 Diesel fuel
  • +2.7% Ready Mix Concrete
  • +1.3% Precast concrete products
  • +1.3% Flat Glass
  • +0.1% Gypsum products
  • +6.1% Lumber and Plywood
  • -5.7% Steel pipe and tube
  • -11.5% Aluminum mill shapes
  • +2.2% Fabricated structural metal
  • +10.3% Fabricated structural metal bar joists and reinforcing bars
  • +11.9% Fabricated structural metal for non-industrial buildings
  • -3.7% Fabricated structural metal for bridges
  • -2.2% Fabricated steel plate
  • +1.6% Iron and steel scrap

AGC’s Table of June 2020 PPI

AGC does not publish year-to-date values. The data in this post is the combined effect of comparing June to March and March to December.

Construction Inflation 2020

1-28-20   Inflation excerpt from the complete economic report – Construction Analytics 2020 Construction Economic Forecast – Jan 2020

See also Click Here for Link to a 20-year Table of 25 Indices

Construction Inflation

The level of construction activity has a direct influence on labor and material demand and margins and therefore on construction inflation.

Nonresidential buildings inflation, after hitting 5% in both 2018 and 2019, is forecast for the next three years to fall from 4.4% to 3.8%, lower than the 4.5% average for the last 4 years.

Residential construction inflation in 2019 was only 3.6%. However, the average inflation for six years from 2013 to 2018 was 5.5%. It peaked at 8% in 2013 but dropped to 4.3% in 2018 and only 3.6% in 2019. Forecast residential inflation for the next three years is level at 3.8%.

Nonresidential Buildings and Non-building Infrastructure backlog are both at all-time highs. 75% to 80% of all nonresidential spending within the year comes from starting backlog. Most spending for residential comes from new starts in the year.

2020 starting backlog is up 5.5% across all sectors. However, while a few markets will outperform in 2020 (transportation, public works, office), predicted cash flow (spending) from backlog is up only 1% to 2%. Long duration projects added to backlog and will spread spending out over the next few years.

Residential new construction starts in 2019 (number of units started) gained 4% over 2018. In 2018, starts dropped every quarter after Q1, but then increased every quarter in 2019 and closed out the 2nd half of 2019 at 9% higher than the average of the previous six quarters. New starts measured in dollars dropped slightly in 2019. Spending from new starts fell 5% in 2019 but is forecast up 6% for 2020. Residential construction volume (spending after inflation) in 2019 dropped 8%, the largest volume decline in 10 years. Volume in 2019 dropped to a 4-year low. A volume gain of 2% in 2020 leaves residential still at a 4-year low.

General construction cost indices and Input price indices that don’t track whole building final cost do not capture the full cost of inflation on construction projects.

To differentiate between Revenue and Volume you must use actual final cost indices, otherwise known as selling price indices, to properly adjust the cost of construction over time.

Selling Price is whole building actual final cost. Selling price indices track the final cost of construction, which includes, in addition to costs of labor and materials and sales/use taxes, general contractor and sub-contractor margins or overhead and profit.

Consumer Price Index (CPI), tracks changes in the prices paid by consumers for a representative basket of goods and services, including food, transportation, medical care, apparel, recreation, housing. This index in not related at all to construction and should not be used to adjust construction pricing.

Producer Price Index (PPI) for Construction Inputs is an example of a commonly referenced construction cost index that does not represent whole building costs. Engineering News Record Building Cost Index (ENRBCI) and RSMeans Cost Index are examples of commonly used indices that do not capture whole building cost.

Producer Price Index (PPI) Material Inputs (which excludes labor and margins) to new construction increased +4% in 2018 after a downward trend from +5% in 2011 led to decreased cost of -3% in 2015, the only negative cost for inputs in the past 20 years. Input costs to nonresidential structures in 2017+2018 average +4.3%, the highest in seven years. Infrastructure and industrial inputs were the highest, near 5%. But input costs for 2019 are coming in at less than +1%. Material inputs accounts for only a portion of the final cost of constructed buildings.

Materials price input costs in 2019 slowed to an annual rate of less than 1%.  

Labor input is currently experiencing cost increases. The National construction unemployment rate was recently posted below 4%, the lowest on record with data back to 2000.  The average has been below 5% for the last 18 months. During the previous expansion it hit a low average of 5%. During the recession it went as high as 25%. An unemployment rate this low signifies a tight labor market. This may cause contractors to pay premiums over and above normal wage increases to keep valued workers from leaving. Some premiums accelerate labor cost inflation but are not recorded in published wage data, so aren’t easily tracked. Lack of experienced workers and premiums to keep labor drive labor cost increases higher than wage growth.

Although many contractors report shortages due to labor demand, labor growth may slow due to a forecast 2019-2020 construction volume decline. We might see a jobs decline lag spending/volume decline.

When construction activity is increasing, total construction costs typically increase more rapidly than the net cost of labor and materials. In active markets overhead and profit margins increase in response to increased demand. These costs are captured only in Selling Price, or final cost indices.

Construction Analytics Building Cost Index, Turner Building Cost Index, Rider Levett Bucknall Cost Index and Mortenson Cost Index are all examples of whole building cost indices that measure final selling price (for nonresidential buildings only). The average annual growth for all these indices over the past five years is 4.7%/year. For the last two years, average nonresidential buildings inflation is 5.3%.

  • Long-term construction cost inflation is normally about double consumer price index (CPI).
  • Average long-term nonresidential buildings inflation excluding recession years is 4.2%.
  • Average long-term (30 years) nonresidential construction cost inflation is 3.5% even with any/all recession years included.
  • In times of rapid construction spending growth, nonresidential construction annual inflation averages about 8%. Residential has gone as high as 10%.
  • Nonresidential buildings inflation has average 3.7% since the Great Recession bottom in 2011. It has averaged 4.2% for the last 4 years.
  • Residential buildings inflation reached a post-recession high of 8.0% in 2013 but dropped to 3.4% in 2015. It has averaged 5.8% for the last 5 years.
  • Although inflation is affected by labor and material costs, a large part of the change in inflation is due to change in contractors/supplier margins.
  • When construction volume increases rapidly, margins increase rapidly.
  • Construction inflation can be very different from one major sector to the other and can vary from one market to another. It can even vary considerably from one material to another.

Residential construction inflation in 2019 was only 3.6%. However, the average inflation for six years from 2013 to 2018 was 5.5%. It peaked at 8% in 2013 but dropped to 4.3% in 2018 and only 3.6% in 2019. Residential construction volume in 2019 dropped 8%, the largest volume decline in 10 years. Typically, large declines in volume are accompanied by declines in inflation. Forecast residential inflation for the next three years is level at 3.8%.

A word about Hi-Rise Residential. Probably all of the core and shell and a large percent of interiors cost of a hi-rise residential building would remain the same whether the building was for residential or nonresidential use. This type of construction is totally dis-similar to low-rise residential, which in large part is stick-built single family homes. Therefore, use the residential cost index for single family but a more appropriate index to use for hi-rise residential construction is the nonresidential buildings cost index.

Nonresidential inflation, after hitting 5% in both 2018 and 2019, is forecast for the next three years to fall from 4.4% to 3.8%, lower than the 4.5% average for the last 4 years. Spending needs to grow at a minimum of 4.4%/yr. just to stay ahead of construction inflation, otherwise volume is declining. Spending slowed dramatically in 2019. However, new starts in 2018 and 2019 boosted backlog and 2020 spending will post the strongest gains in four years.

Several Nonresidential Buildings Final Cost Indices averaged over 5% per year for the last 2 years and over 4% per year for the last 5 years. Nonresidential buildings inflation totaled 22% in the last five years. Input indices that do not track whole building cost would indicate inflation for those five years at only 12%, much less than real final cost growth. For a $100 million project escalated over those five years, that’s a difference of $10 million, potentially underestimating cost.

Notice in this next plot how index growth is much less for ENR BCI and RSMeans, both input indices, than for all other selling price final cost indices. From 2010 to 2019, total final price inflation is 110/80 = 1.38 = +38%. Input cost indices total only 106/85 = 1.25 = +25%, missing a big portion of the cost growth over time.

 Nonresidential Buildings Selling Price Indices vs Input Indices

BCI 2010-2020 Firms 12-9-19

Non-building infrastructure indices are so unique to the type of work that individual specific infrastructure indices must be used to adjust cost of work. The FHWA highway index increased 17% from 2010 to 2014, stayed flat from 2015-2017, then increased 15% in 2018-2019. The IHS Pipeline and LNG indices increased 4% in 2019 but are still down 18% since 2014. Coal, gas, and wind power generation indices have gone up only 5% total since 2014. Refineries and petrochemical facilities dropped 10% from 2014 to 2016 but regained all of that by 2019. BurRec inflation for pumping plants and pipelines has averaged 2.5%/yr since 2011 and 3%/yr the last 3 years.

Anticipate 3% to 4% inflation for 2020 with the potential to go higher in rapidly expanding Infrastructure markets, such as pipeline or highway.  This link refers to Infrastructure Indices.

 Construction Analytics Building Cost Index

BCI 2005-2022 12-9-19

In the following plot, Construction Analytics Building Cost Index annual percent change for nonresidential buildings is plotted as a line against a bar chart of the range of all other nonresidential building inflation indices. Bars represent the predicted range of inflation from various sources with the solid line showing the composite final cost inflation. Note that although 2015 and 2016 have a low end of predicted inflation of less than 1%, the actual inflation is following a pattern of growth above 4%. The low end of the predicted range is almost always established by input costs (ENR BCI is plotted), while the upper end of the range and the actual cost are established by selling price indices.

 Construction Analytics Nonresidential Buildings Cost Index

vs Range of Input Indices

Inflation Range 1993-2020 plot vs ENR 1-18-20

As noted above, some reliable nonresidential selling price indexes have been over 4% since 2014. Currently most selling price indices are over 5% inflation since 2018.

 

Reference Inflation PCT 12-17-19

Every index as published has its own base year = 100, generally the year the index was first created, and they all vary. All indices here are converted to the same base year, 2017 = 100, for ease of comparison. No data is changed from the original published indices.

Reference Inflation INDEX 12-17-19

Non-building Infrastructure indices are far more market specific than any other type of index. Reference specific Infrastructure indices rather than any average.

A word about terminology: Inflation vs Escalation. These two words, Inflation and Escalation, both refer to the change in cost over time. However escalation is the term most often used in a construction cost estimate to represent anticipated future change, while more often the record of past cost changes is referred to as inflation. Keep it simple in discussions. No need to argue over the terminology, although this graphic might represent how most owners and estimators reference these two terms.

Inflation Escalation with text

This link points to comprehensive coverage of the topic inflation and is recommended reading. Click Here for Link to a 20-year Table of 25 Indices

 

Construction Analytics Voted Best Construction Blog 2019

Ed Zarenski’s Construction Analytics blog

won the 2019 Best Construction Blog competition.

blog best

“Sometimes patience and quality count more for success than razzle dazzle and pushy marketing. These observations seem appropriate for the 2019 Best Construction Blog winner, Ed Zarenski’s Construction Analytics.”

“His blog’s uniqueness and success results from its detailed analysis and data about the construction economics topic, including forecasts and projections — with a Google search leadership relating to construction inflation.”

“Zarenski’s blog, effectively, provides a solid overview of the construction industry’s economic picture. That knowledge is useful for contractors, suppliers and professionals seeking to benchmark performance and plan their business’s future based on industry-focused but larger economic trends.”

Construction Analytics wins 2019 Best Construction Blog competition

 

 

Inflation and Forecasting Presentation Advancing Precon & Estm Conf 5-22-19

This is a PDF of slides (including notes) from my

Construction Inflation & Forecasting Presentation

at Hanson Wade

Advancing Preconstruction & Estimating Conference

 Dallas, TX 5-22-19

Advancing Pre-construction & Estimating conference 2019

Full EdZ Presentation Inflation-Forecasting w notes HW-APE 5-22-19 PDF

Construction Forecasting – Volume

Feb 26, 2019

Since the bottom of the construction recession year 2011, through 2018 construction spending has increased 67%. During that time construction volume has increased only 32%. All the rest was inflation.

Construction spending is not the only factor for business growth planning. The adjustment for Inflation is the most important factor.

If your company revenues are increasing at a rate of 7% per year at a time when construction inflation is 5%, your business volume is increasing only 2% per year. If you do not factor inflation into your growth projections, you are not forecasting growth properly. Spending is revenue. Volume is spending minus inflation.

Spend current vs constant 2018 2-26-19

Look at the data to the left of the vertical line through 2006. Notice in the bottom plot in the years 2004 and 2005 there is very high spending but very low volume. In 2006 spending was up 4% but real volume declined 3%. For those three years inflation totaled nearly 30%. On the top plot you can see the cumulative effect of several years of high inflation. From 2000 to 2006 spending increased 45% but volume barely moved at all. During this period jobs increased by about 15% and even that outpaced volume. Businesses watched as spending increased 45% in seven years. They increased staff by 15%, but real volume was flat. Heading into the recession construction dollars on the books had been increasing for years but volume was stagnant and companies were top-heavy with jobs.

Addressing the current period 2011 through 2018, if you base business growth on your annual revenue growth, or spending, rather than using inflation adjusted dollars, your forecast for business growth over this eight year time period would be more than double actual volume growth.

Notice the blue bars for annual spending growth in 2017 and 2018 at approximately 4% and 5% respectively. But look at the black lines superimposed on those bars that reflect real volume growth after inflation. There has been only 1% real volume growth in the last two years. Yet jobs increased 8% in two years. Most of the growth in spending is inflation dollars, not real volume growth. Inflation does not support jobs growth.

For 2017-2018 residential spending increased 17% but volume was up only 7%. Nonresidential buildings spending up 6.5% but volume was down 2.5%. Non-building infrastructure spending was up 4% but volume was down by 3%. Inflation across these sectors totaled 7% to 10% for these two years.

Construction jobs, now over 7,400,000 have been over 7,300,000 since summer 2018. The last time jobs were over 7,300,000 was mid-2005 through early 2008, at which point the recession abruptly caused the loss of over 700,000 jobs within 10 months and more than 2 million jobs over the next three years. Jobs are now only 5% lower than the previous high of 7,700,000 in 2006-2007. But construction volume is still 15% below peak constant $ volume reached in early 2006. So the current situation of jobs growth rate exceeding volume growth is worse than it was leading into the last recession.

For 2019 I expect residential and nonresidential buildings to experience a slight decline in volume. I do not yet see a recession as volume picks up again in 2020, but  nonresidential construction jobs in particularly have been increasing faster than volume for several years. Part of that is explained by some nonresidential workers are used to build residential space (hi-rise structure). When the next downturn hits, the potential need to cut nonresidential construction jobs may be quite painful.

Construction Spending is Back

3-9-18

We’ve all seen headlines like, “Construction Spending is back to previous level”, or “Construction Spending back to a new high.” Here’s how even true information can be deceiving.

It’s true, construction spending in current $ reached a new high in 2017 at $1,236 billion. The previous high in current $ was $1,161 in 2006. Spending surpassed that in 2014 and has been increasing since. But that is in current $, which includes inflation.

Let’s say a store will sell a bushel of apples, cost $100 in 2014, $110 in 2015, $120 in 2016 and $130 in 2017. If we look at the current $ spent on apples each year, it looks like business is booming, up 30% in 3 years. But the reality is, with the exception of inflation, the apple business has not changed at all. Only one bushel of apples sold every year. The year to year change in un-adjusted current $ is the increase in cost, not the increase in volume.

Comparing current $ spending to previous year spending does not give any indication if business is increasing. The inflation factor is missing. If spending is increasing at 4%/year in a time when inflation is 6%/year, real volume is declining by 2%.

Total construction spending in constant $ (inflation adjusted $) reached $1,236 billion in 2017. After adjusting all previous spending to equivalent 2017$, we can see that all years from 1997 through 2008 had higher volume than 2017.  In 2000-2001 volume was just over $1,400 billion and in 2005 volume reached a peak at $1,454 billion. While spending in current $ is 7% higher than the previous high spending, volume is still 15% lower than the previous high volume.

Spend 1970-2020 Total 3-9-18

Nonresidential buildings construction spending in constant $ (inflation adjusted $) reached $419 billion in 2017. Previous spending adjusted to equivalent 2017$ shows that all years from 1995 through 2010 had higher volume than 2017. Volume reached a peak $536 billion in 2000 and went over $500 billion again in 2008. Spending in current $ is almost back to the peak of $438 billion in 2008, but volume is lower than almost all years from 1985 to 2010 and is still 22% lower than the 2000 high volume.

Spend 1970-2020 Nonres Bldgs 3-9-18

Non-building Infrastructure construction spending in constant $ reached $294 billion in 2017. Recent highs were posted in 2015 and 2016 at $305 billion and $304 billion and 2018 is expected to reach $319 billion. Previous spending adjusted to equivalent 2017$ shows that 2008 and 2009 were both just slightly higher than $300 billion. Volume reached a peak $313 billion in 2016. Spending in current $ hit new highs in 2015 and 2016. This is the only sector that has current $ and constant $ at or near all-time highs.

Spend 1970-2020 NonBldg Infra 3-9-18

Residential buildings construction spending in constant $ reached $523 billion in 2017. Previous spending adjusted to equivalent 2017$ shows that all years from 1996 through 2007 had higher volume than 2017. Volume reached a peak $748 billion in 2005. Only the years 2004-2006 had higher spending in current $. The 2005 current $ peak of $630 billion is still 17% higher than 2017, but 2017 volume is still 30% lower than peak volume.

Spend 1970-2020 Residential 3-9-18

This has several implications besides misleading headlines that claim construction is at a new high. Just look at the period 1996-2007 on the residential plot. Spending in current $ increased 130% from $270 billion to $620 billion. But this was during a period that recorded some of the highest residential construction inflation on record. Inflation was 90%. Follow the guidelines up to constant$ and see that real volume increased only 40% from $530 billion to $750 billion.

If you are hiring to meet your needs and you see that spending (revenue) has increased by 130%, do you hire to meet revenue? No. Hiring requires a knowledge of volume growth. Residential jobs during this time frame increased by 55%, more than real volume growth, but no where near the 130% spending growth.

The above plots were developed using current and historical Census construction spending and inflation indices were developed from construction industry resources, documentation which can be found here on this blog.

See also

Residential Construction Jobs Shortages 2-3-18

Constant Dollar Construction Growth 11-2-17

Inflation in Construction 2018 – What Should You Carry? 2-15-18

ESCALATION / INFLATION INDICES

 

Inflation in Construction 2019. What Should You Carry?

1-28-20 See the latest post Construction Inflation 2020

8-26-19 go to this article for  Added links to sources for international construction inflation rates

1-14-20 added new index table covering 2015-2023 at Index Table Link – see link to Tables below

This table updates 2018 and 2019 data and 2020-2023 forecast. Nonresidential inflation, after hitting 5% in both 2018 and 2019, is forecast for the next three years to fall from 4.4% to 3.8%, lower than the 4.5% avg for the last 4yrs. Forecast residential inflation for the next three years is level at 3.8%. It was only 3.6% for 2019 but averaged 5.5%/yr since 2013. 

 

When construction is very actively growing, total construction costs typically increase more rapidly than the net cost of labor and materials. In active markets overhead and profit margins increase in response to increased demand. These costs are captured only in Selling Price, or final cost indices.

General construction cost indices and Input price indices that don’t track whole building final cost do not capture the full cost of inflation on construction projects.

To properly adjust the cost of construction over time you must use actual final cost indices, otherwise known as selling price indices.

ENRBCI and RSMeans input indices are examples of commonly used indices that DO NOT represent whole building costs, yet are widely used to adjust project costs. An estimator can get into trouble adjusting project costs if not using appropriate indices. This plot of cost indices for nonresidential buildings shows how input indices did not drop during the 2008-2010 recession while all other final cost indices did drop.

BCI 2005-2020 Firms 2-24-19

CPI, the Consumer Price Index, tracks changes in the prices paid by urban consumers for a representative basket of goods and services, including food, transportation, medical care, apparel, recreation, housing. The CPI is not related at all to construction and should not be used to adjust construction pricing. Historically, Construction Inflation is about double the CPI, but for the last 5 years construction inflation averages 3x the CPI.

Producer Price Index (PPI) Material Inputs (which exclude labor) to new construction increased +4% in 2018 after a downward trend from +5% in 2011 led to decreased cost of -3% in 2015, the only negative cost for inputs in the past 20 years. Input costs to nonresidential structures in 2017+2018 average +4.3%, the highest in seven years. Infrastructure and industrial inputs were the highest, near 5%. But material inputs accounts for only a portion of the final cost of constructed buildings.

Materials price input costs in 2019 slowed to an annual rate of less than 1%. 

Labor input is currently experiencing cost increases. When there is a shortage of labor, contractors may pay a premium to keep their workers. Unemployment in construction is the lowest on record. The JOLTS ( Job Openings and Labor Turnover Survey) is at or near all-time highs. A tight labor market will keep labor costs climbing at the fastest rate in years.

Click Here for Link to a 20-year Table of 25 Indices

Inflation can have a dramatic impact on the accuracy of a construction budget. Usually budgets are prepared from known current costs. If a budget is being developed for a project whose midpoint of construction costs is two years in the future, you must carry an appropriate inflation factor to represent the expected cost of the building at that time.

The level of construction activity has a direct influence on labor and material demand and margins and therefore on construction inflation. Nonresidential Buildings and Non-building Infrastructure backlog are both at all-time highs. 75% to 80% of all nonresidential spending within the year comes from starting backlog.

Although nonresidential buildings new starts are up only 5% the last three years, spending from backlog in 2020 is up 20% in three years and reaches an all-time high.

Most spending for residential comes from new starts. Residential new starts in Q1-2018 reached a 12 year high. Spending from new starts in 2019 fell 6% but is up 6% for 2020. Spending from new starts in 2020 is back to the level posted in 2017 and 2018.

2020 starting backlog is up 5.5% across all sectors. However, while a few markets will outperform in 2020 (transportation, public works, office), predicted cash flow (spending) from backlog is up only 1% to 2%.

Although many contractors report shortages due to labor demand, labor growth may slow due to a forecast 2019-2020 construction volume decline. But, we might see a labor decline lag spending/volume decline.

Expect 2019 escalation in almost all cases to finish at or lower than 2018.

Residential construction inflation in 2019 was only 3.6%. However, the average inflation for six years from 2013 to 2018 was 5.5%. It peaked at 8% in 2013, but dropped to 4.3% in 2018 and only 3.6% in 2019. Residential construction volume in 2019 dropped 8%, the largest volume decline in 10 years. Typically, large declines in volume are accompanied by declines in inflation. Forecast residential inflation for the next three years is level at 3.8%.

Note 8-2-19: Residential inflation for the 1st half of 2019 has come in at only 3.5%.

A word about Hi-Rise Residential. Probably all of the core and shell and a large percent of interiors cost of a hi-rise residential building would remain the same whether the building was for residential or nonresidential use. This type of construction is totally dis-similar to low-rise residential, which in large part is stick-built single family homes. Therefore, use the residential cost index for single family but a more appropriate index to use for hi-rise residential construction is the nonresidential buildings cost index.

Nonresidential inflation, after hitting 5% in both 2018 and 2019, is forecast for the next three years to fall from 4.4% to 3.8%, lower than the 4.5% average for the last 4 years. Spending needs to grow at a minimum of 4.4%/yr. just to stay ahead of construction inflation, otherwise volume is declining. Spending slowed dramatically in 2019. However, new starts in 2018 and 2019 boosted backlog and 2020 spending will post the strongest gains in four years.

Material tariffs in 2018 and 2019 are already incorporated into inflation. Adjust for any new tariffs impact. 

In another article on this blog, (see steel cost increase), I calculated the 25% tariff on steel would cost nonresidential buildings 1%. Some Infrastructure could be much more, i.e., bridges 4-5%. Residential impact would be small. A 25% increase in mill steel could add 0.65% to final cost of building just for the structure. It adds 1.0% for all steel in a building. If your building is not a steel structure, steel still potentially adds 0.35%. 

Note 8-2-19: Nonresidential Buildings inflation for the 1st half of 2019 as tracked by most national selling price indices has come in at just over 5%.

Reliable nonresidential buildings selling price indexes have been over 4% since 2015. Some have averaged over 5% for the last four years. Construction Analytics forecast (line) for 2019 is currently 5.1%. This may move higher due to the impact of September 2019 tariffs which are not yet reflected in any indices.

Inflation Range 1993-2020 plot vs ENR 1-18-20

Non-building infrastructure indices are so unique to the type of work that individual specific infrastructure indices must be used to adjust cost of work. The FHWA highway index increased 17% from 2010 to 2014, stayed flat from 2015-2017, then increased 15% in 2018-2019. The IHS Pipeline and LNG indices increased 4% in 2019 but are still down 18% since 2014. Coal, gas, and wind power generation indices have gone up only 5% since 2014. Refineries and petrochemical facilities dropped 10% from 2014 to 2016 but regained all of that by 2019. BurRec inflation for pumping plants and pipelines has averaged 2.5%/yr since 2011 and 3%/yr the last 3 years.

Anticipate 3% to 4% inflation for 2019 with the potential to go higher in rapidly expanding Infrastructure markets, such as pipeline or highway.

This link refers to Infrastructure Indices.

Watch for unexpected impacts from tariffs. Steel tariff could potentially add 5% to bridges. Also impacted, power industry, pipeline, towers, transportation. 

  • Long term construction cost inflation is normally about double consumer price inflation (CPI).
  • Since 1993 but taking out 2 worst years of recession (-8% to -10% total for 2009-2010), the 20-year average inflation is 4.2%.
  • Average long term (30 years) construction cost inflation is 3.5% even with any/all recession years included.
  • In times of rapid construction spending growth, construction inflation averages about 8%.
  • Nonresidential buildings inflation has average 3.7% since the recession bottom in 2011. It has averaged 4.2% for the last 4 years.
  • Residential buildings inflation reached a post recession high of 8.0% in 2013 but dropped to 3.4% in 2015. It has averaged 5.8% for the last 5 years.
  • Although inflation is affected by labor and material costs, a large part of the change in inflation is due to change in contractors/suppliers margins.
  • When construction volume increases rapidly, margins increase rapidly.
  • Construction inflation can be very different from one major sector to the other and can vary from one market to another. It can even vary considerably from one material to another.

BCI 2001-2020 8-10-19

 

The two links below point to comprehensive coverage of the topic inflation and are recommended reading.

Click Here for Link to a 20-year Table of 25 Indices

Click Here for  Cost Inflation Commentary – text on Current Inflation

 

 

 

US Historical Construction Cost Indices 1800s to 1957

Historical Cost Indices Dating Back to 1800s

See pages 379-386 for indices

See page 387 for start of Housing

Chapter on Housing Historical Data

U S Census Historical Construction Spending Annual totals 1964-2002  USE Table 1

 

 

Cautions When Using PPI Inputs to Construction!

The Producer Price Index (PPI) for material inputs to construction gives us an indication whether costs for material inputs are going up or down. The PPI tracks producers’ cost to produce the product and supply finished products to retailers or contractors. However, that is far from the total cost from the contractor.

A good example is steel. The producer price for steel from the mill might be $750/ton for long beams and columns. The only increases captured at the producer level might be the changes in cost for raw material, energy to manufacture and the producers labor and markup. But the structural steel contractor is then responsible for delivery to shop, detailing, shop fabrication, transport to construction site, load and unload, cranes and welding equipment needed to install, installation crews and finally overhead and profit accounting for at least eight more points of potential cost change. Finally the steel subcontractor must then assess the market conditions, whether tight or favorable to higher profits, to adjust the bid price or selling price. The final cost of steel installed could be $3000/ton.

The PPI for Construction Inputs IS NOT a final indicator of construction inflation. It is an input to construction inflation. It does not represent the selling price, nor does it give any indication of the trend, up or down, of selling price.

In 2009 PPI for inputs was flat but construction inflation, as measured by final cost of buildings, was down 8% to 10%. In 2010, the PPI for construction inputs was up 5.3% but the selling price was flat. Construction inflation, based on several decades of trends, is approximately double consumer inflation. However, from mid-2009 to late 2012, that long-term trend did not hold up. During that period, PPI ranged from 0% to +6.8%, but construction inflation/deflation ranged from -10% to +2.3%, lower than PPI for all four years, something which seldom occurs. Construction inflation/deflation was primarily influenced by depressed bid margins, which had been driven lower due to diminished work volume.

The following table shows the differences between the PPI Inputs from 2011 to 2017 and the actual inflation for the major construction sectors. This table shows clearly that PPI Inputs and Inflation not only can vary widely but also may not even move in the same direction.

AAA PPI vs Inflation 2011-2017

The PPI tables published by the Bureau of Labor Statistics do include several line items that represent Final Trades Cost or Whole Building Cost. Those PPI items don’t give us any details about the producer price or retail price of the materials used, but they do include all of the contractors costs incurred, including markups, on the final product delivered to the consumer, the building owner. I would note however that those line items in the PPI almost always show lower inflation than final Selling Price inflation indices developed separately from the PPI. Follow this link to table of inflation values which includes the PPI final cost for trades and buildings. 

Construction Managers responsible for working with the client to manage project cost, part of which includes preparing a full building cost estimate, should not rely on PPI values as an indication of inflation. Selling price inflation indices are more appropriate indices to use to adjust project costs.

It is always important to carry the proper value for cost inflation. Whether adjusting the cost of a recently built project to predict what it might cost to build a similar project in the near future, or answering a client question, “What will it cost if I delay my project start?”, the proper value for inflation (which differs by sector and differs every year) can make or break your estimate.

Contractors responsible for a particular building material, although the PPI Inputs will not track market conditions sale prices from producer to the contractor, can get some indication of whether material prices are rising or falling. Contractors should be aware of PPI trends to interpret the data throughout the year.

PPI TRENDS HELP TO INTERPRET THE DATA

  • 60% of the time, the highest increase of the year in the PPI is in the first quarter.
  • 75% of the time, two-thirds of the annual increase occured in the first six months.
  • In 25 years, the highest increase for the year has never been in Q4.
  • 60% of the time, the lowest increase of the year in the PPI is in Q4.
  • 50% of the time, Q4 is negative, yet in 25 years the PPI was negative only four times.

So when you see monthly news reports from the industry exclaiming, “PPI is up strong for Q1” or “PPI dropped in the 4th Qtr.” it helps to have an understanding that this may not be unusual at all and instead may be the norm.

 

PPI Construction Materials Inputs Index

Inflation Index vs Spending

The two plots lined up here represent spending and spending corrected for inflation or real volume growth in the top plot versus construction inflation in the bottom plot. On the Inflation plot, the black line represents final selling price, actual inflation. The red line represents the ENR Building Cost Index which is a fixed market basket of labor and materials, not a complete selling price index. All plots are for nonresidential buildings only.

The index shows how cost inflation climbs in periods when spending is accelerating and the index slows when spending is increasing slowly. Also we can see that the major decline in spending resulted in a major deflation in the index. Note the ENR BCI does not show the major decline in the inflation index. That’s because the ENR BCI is not final selling price. It shows what the cost of labor and materials did during that period,  but does not capture how contractors adjusted their margins down so deeply due to loss of volume.

The takeaway from this comparison is this:

  • Labor and material indices do not show what real total inflation is doing
  • When spending increases rapidly, inflation increases rapidly
  • When spending increases slowly, inflation increases slowly
  • An understanding of which direction and how much spending is moving is more important to predicting inflation than the change in the cost of labor and materials

 

Index vs Spending 1993-2016 5-13-17

 

See Also 1st Qtr Update 2017 Construction Spending Forecast

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