Cost Increases Easing Except for Nonresidential Labor
Jim Haughey
Construction costs have weakened quickly in the last few months under pressure from the 10% drop in construction activity since the February 2006 peak level. The 40% drop in single family construction spending has more than offset still rising nonresidential construction spending. Residential labor rates and margins and prices for materials heavily used in residential construction have fallen significantly but labor rates and margins for nonresidential buildings and heavy projects have yet to weaken although some modest weakening is expected in the next year.
The Labor Department price index for construction materials was at the same level in October as it was in May. Prices for some items rose during the summer but have since declined. The only significant changes since May are the 10% increase for diesel fuel and 9% increase for nonferrous pipes and tubes. These increases are more due to the falling dollar and strong world commodity demand than domestic construction spending trends. Even higher prices are likely into the winter before the commodity “bubbles” for these two items burst. These increases were offset by the 12% drop in gypsum prices and 4% decline in lumber and structural steel prices since May.
Average hourly wages paid by general contractors increased at a slim 2% annual rate since May after rising over 5% in the year ending in April. Since May, the average hourly rate paid is unchanged for residential contractors. But labor supply remains tight in other construction markets. Since May, nonresidential building contractors have raised hourly wages at a 5% annual rate and heavy contractors have given even larger raises.
The dichotomy between cost trends in the single family market and the balance of the construction market will widen further into the spring, possibly the summer. Then the gap will begin to close when activity begins to pick up at homebuilding sites and spending growth at other construction sites drops from the recent 1%/month plus pace to about 0.6-0.7%/month.
The materials price index is expected to decline slightly more through the spring. Residential labor costs are unlikely to move above the current level until late next year. Labor costs for other contractors will keep rising through next year faster than overall inflation in the economy but the pace of wage gains will begin to slow by mid-2008.
