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By: Alex Carrick on December 2nd, 2021

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Gap Between Bid Price Increases and Material Cost Increases Is Narrowing

Economic News

In the spring and summer of this year, a huge gap opened between construction bid prices that were staying low on a year-over-year basis and material input costs, also y/y, that were soaring into the stratosphere.  

Gap Between Increases in Material Costs & Bid Prices Shrinks; Still Immense Graphic

Graph 1 shows the comparisons. The top curve records the average gain for two PPI series measuring construction material cost hikes. The bottom curve captures bid prices. The PPI code numbers are WPUIP231000, WPUSI012011, and WPUFD43.  

Over the past several months, there’s been some downward adjustment in the materials cost structure. The top curve in Graph 1 descended from its peak, but then it did jog back upwards slightly in October. The bottom curve for bid prices has been increasing, with an especially big jump in the latest month, to +12.3% y/y.

Forestry products are where the first big and outrageous escalation in costs began earlier this year, with softwood lumber prices in May being +161% year over year.

There’s been a sigh of relief at seeing the cost of softwood lumber turn -19.5% y/y in October and -25.3% during the past three months.

This doesn’t mean there will be a corresponding financial break for purchasers of new homes. U.S. sawmills supply only about 70% of the product needed for American homebuilding. Imports from Canada make up almost all the rest and the average tariff on shipments from north of the border has just been doubled from a rounded 9% to a rounded 18%.

Also, not all wood products have seen large price drops. Hardwood lumber and millwork, appearing as line items in Table 2 at the end of this article, are +45.6% y/y and +14.4% y/y respectively.  

Also, even with their price retreats, softwood lumber, plywood, and particle board/oriented strand board are currently at levels higher than at any other time this century

Some other highlights from the latest PPI results include the following.

Among all construction inputs, steel products are displaying the most eye-catching cost climbs.

From Cluster Chart 2, ‘steel bars, plates, and structural shapes,’ ‘steel pipe and tube’ and ‘prefabricated metal buildings’ are all up by half or more year over year and their levels are at new peaks since turning into the 2000s.

From Cluster Chart 3, cement and ready-mix concrete prices, while pulling ahead a bit, still remain relatively restrained compared with most other materials, +4.9% y/y and +4.3% y/y respectively.

There are two related products, however, which don’t appear in Cluster Chart 3, but which do make up line items in Table 2, precast concrete and prestressed concrete. The price of the former is +11.8% y/y; and of the latter, +12.5% y/y.

Cluster Chart 4 features an extraordinary takeoff in the price of aluminum mill shapes, +37.5% y/y and +9.1% during the latest three months. Plus, the index level (which directly reflects the real-world price level) for aluminum mill shapes is a third higher than its previous peak in early 2018.

Highlights from Cluster Charts 5 through 7 include the +9.8% y/y leap for flat glass, which normally keeps a more sedate profile.

Heating equipment (+15.5% y/y) and air conditioning equipment (+12.6%) are two other product categories showing inordinately large year-over-year price hikes.

Finally, from the shaded-in-blue section at the top of Table 2, there are five subcategories of bid price indices (i.e., the plainer way of saying ‘final demand’ indices) covering various types of structures.

At the low end, presently, are bid prices for ‘new school building,’ +9.6% y/y. At the other and upper extreme are bid prices for new warehouses, +21.2% y/y.

During the pandemic, and with the stampede of retail trade to the internet, the building of fulfillment and distribution centers has been one of the few truly strong bulwarks of nonresidential construction activity.

Graph 1: U.S. Construction Bid Prices vs Material Input Costs - October 2021
The gap between material cost increases y/y and bid price increases y/y is narrowing, but it still remains sizable. Among types of structure, bid prices for warehouses increased the most in October, +21.2% y/y. At the low end, bids for new school building were +9.6% y/y.
*Average of two PPI indices: (1) WPUIP231000 inputs to new construction, excluding capital investment (i.e., machinery & equipment), labor & imports; and (2) WPUSI012011 construction materials 'special' index. Latest data points are for October 2021.
Data source: Bureau of Labor Statistics, Producer Price Index data set.
Chart: ConstructConnect.
Table 1: U.S. Construction Material Cost Changes
From Producer Price Index (PPI) Series - October 2021
Some of the forestry product categories have eased, although hardwood (not shown here) is +45.6% y/y) and millwork, +14.4% y/y. Plus, the duties on imported Canadian softwood were recently doubled. ... Also not shown, precast and prestressed concrete are +11.8% y/y and  +12.5% y/y.
Data source: Bureau of Labor Statistics (BLS).
Table: ConstructConnect.
Graph Cluster 1 - Forestry Products: U.S. Construction Material Costs (1) - From Producer Price Index (PPI) Series
U.S. Construction Material Costs (1) - From Producer Price Index (PPI) Series
The last data points are for October 2021.
Data source: U.S. Bureau of Labor Statistics (BLS), Producer Price Index (PPI) series, not seasonally adjusted (NSA).
Charts: ConstructConnect.
Graph Cluster 2 - Steel Products: U.S. Construction Material Costs (2) - From Producer Price Index (PPI) Series
U.S. Construction Material Costs (2) - From Producer Price Index (PPI) Series
The last data points are for October 2021.
Data source: U.S. Bureau of Labor Statistics (BLS), Producer Price Index (PPI) series, not seasonally adjusted (NSA).
Charts: ConstructConnect.
Graph Cluster 3 - Cement: U.S. Construction Material Costs (3) - From Producer Price Index (PPI) Series
U.S. Construction Material Costs (3) - From Producer Price Index (PPI) Series
The last data points are for October 2021.
Data source: U.S. Bureau of Labor Statistics (BLS), Producer Price Index (PPI) series, not seasonally adjusted (NSA).
Charts: ConstructConnect.
Graph Cluster 4 - Base Inputs: U.S. Construction Material Costs (4) - From Producer Price Index (PPI) Series
U.S. Construction Material Costs (4) - From Producer Price Index (PPI) Series
The last data points are for October 2021.
Data source: U.S. Bureau of Labor Statistics (BLS), Producer Price Index (PPI) series, not seasonally adjusted (NSA).
Charts: ConstructConnect.
Graph Cluster 5 - Energy-Related: U.S. Construction Material Costs (5) - From Producer Price Index (PPI) Series
U.S. Construction Material Costs (5) - From Producer Price Index (PPI) Series
The last data points are for October 2021.
Data source: U.S. Bureau of Labor Statistics (BLS), Producer Price Index (PPI) series, not seasonally adjusted (NSA).
Charts: ConstructConnect.
Graph Cluster 6 - Accessories & Arterial: U.S. Construction Material Costs (6) - From Producer Price Index (PPI) Series
U.S. Construction Material Costs (5) - From Producer Price Index (PPI) Series
The last data points are for October 2021.
Data source: U.S. Bureau of Labor Statistics (BLS), Producer Price Index (PPI) series, not seasonally adjusted (NSA).
Charts: ConstructConnect.
Graph Cluster 7 - Equipment: U.S. Construction Material Costs (7) - From Producer Price Index (PPI) Series
U.S. Construction Material Costs (5) - From Producer Price Index (PPI) Series
The last data points are for October 2021.
Data source: U.S. Bureau of Labor Statistics (BLS), Producer Price Index (PPI) series, not seasonally adjusted (NSA).
Charts: ConstructConnect.
Table 1: U.S. Producer Price Index (PPI) Results
% Change in the October 2021 Index from:
  3 Years   1 Year    6 months   3 months   1 month 
  Ago   Ago   Ago   Ago   Ago
                   
Final Demand/Service/Commodity/Energy/Input:                  
Final Demand Construction 18.1%   12.3%   9.8%   6.9%   6.6%
   New warehouse building construction 27.2%   21.2%   18.1%   13.3%   13.0%
   New school building construction 15.9%   9.6%   8.1%   5.4%   5.7%
   New office building construction 17.4%   12.1%   8.6%   5.4%   5.8%
   New industrial building construction 21.7%   14.0%   12.6%   9.4%   8.5%
   New health care building construction 17.3%   11.9%   8.7%   7.6%   6.5%
Architectural & engineering services 5.6%   3.7%   0.9%   0.6%   0.6%
Construction machinery & equipment 10.8%   7.0%   4.9%   2.5%   1.6%
Asphalt -4.9%   68.7%   2.1%   -0.7%   -0.6%
Plastic construction products 37.2%   30.3%   17.7%   7.0%   2.5%
Softwood lumber 36.9%   -19.5%   -37.9%   -25.3%   7.3%
Hardwood lumber 32.9%   45.6%   12.2%   2.1%   2.4%
Millwork 24.9%   14.4%   6.1%   -1.0%   1.0%
Plywood 12.7%   -4.4%   -30.4%   -44.4%   -5.3%
Particle board & oriented strandboard (OSB) 75.6%   6.9%   -19.2%   -34.7%   -6.3%
Gypsum 15.9%   25.1%   10.7%   2.3%   1.8%
Insulation materials 14.2%   17.1%   9.7%   4.7%   -1.3%
Construction sand, gravel & crushed stone 13.0%   4.7%   1.9%   0.3%   0.3%
Cement 8.9%   4.9%   1.8%   1.7%   0.5%
Ready-mix concrete 10.0%   4.3%   1.7%   1.2%   0.1%
Precast concrete products 19.9%   11.8%   6.4%   3.4%   1.5%
Prestressed concrete products 14.1%   12.5%   3.4%   1.3%   1.1%
Brick (clay) 12.0%   6.1%   4.8%   2.7%   2.4%
Coal -2.1%   4.2%   3.6%   2.1%   2.3%
Iron ore 34.6%   25.7%   21.5%   2.5%   -1.2%
Iron & steel scrap 38.9%   63.3%   9.2%   -5.4%   1.5%
Steel bars, plates & structural shapes 34.4%   60.0%   25.4%   9.4%   1.2%
Steel pipe & tube 54.3%   73.3%   39.6%   17.6%   3.3%
Fabricated structural metal products 38.0%   38.8%   21.2%   7.9%   1.6%
Prefabricated Metal Buildings 46.2%   49.5%   24.5%   5.3%   0.6%
Aluminum mill shapes 22.4%   37.5%   18.4%   9.1%   1.4%
Flat glass 12.4%   9.8%   6.8%   2.5%   2.6%
Paints, architectural coatings 23.3%   11.6%   7.3%   1.6%   0.7%
Lighting fixtures 11.8%   6.6%   4.5%   2.1%   0.9%
Plumbing fixtures & fittings 10.5%   3.3%   1.9%   0.9%   0.2%
Elevators & escalators 11.5%   5.8%   3.3%   2.2%   1.9%
Heating equipment 20.7%   15.5%   9.0%   4.6%   1.5%
Air conditioning equipment 18.3%   12.6%   8.3%   3.9%   2.4%
Copper wire & cable 33.7%   26.3%   6.7%   0.2%   -1.1%
Regular gasoline unleaded 12.7%   93.9%   21.3%   4.2%   5.5%
Diesel Fuel 38.1%   100.3%   33.0%   15.1%   12.0%
Inputs to new construction 23.6%   18.2%   6.4%   -1.4%   0.9%
Inputs to new residential construction 22.4%   14.2%   3.3%   -4.8%   -0.1%
Inputs to new non-res construction 23.3%   21.1%   8.1%   1.0%   1.3%
   Inputs to commercial construction 23.8%   21.9%   9.1%   1.9%   1.5%
   Inputs to healthcare structures 23.6%   19.9%   7.8%   1.0%   1.3%
   Inputs to industrial structures 24.2%   20.6%   8.9%   2.1%   1.3%
   Inputs to highways & streets 18.5%   21.3%   8.6%   1.4%   1.0%
   Inputs to power & communication structures 22.4%   22.1%   8.3%   1.0%   1.4%
   Inputs to educational & vocational structures 24.2%   18.8%   6.7%   0.2%   1.3%
Construction materials (PPI 'Special Index') 34.8%   30.6%   10.2%   2.0%   1.2%
The 'final demand' indices (at top) reflect the prices paid by owners for the construction of projects. They include material, labor & markups.
The 'service', 'commodity' and 'energy' indices (in the middle section of the table) are based on 'factory-gate' sales prices.
The 'input' indices (at bottom) reflect costs faced by contractors. They exclude capital investment (i.e., machinery & equipment), labor & imports.
The 'input' indices are built up from the 'service' (design, legal, transport & warehousing, etc.) 'commodity' and 'energy' indices.
Data source: Producer Price Index (PPI) series from Bureau of Labor Statistics (BLS).
Table: ConstructConnect.

About Alex Carrick

Alex Carrick is Chief Economist for ConstructConnect. He has delivered presentations throughout North America on the U.S., Canadian and world construction outlooks. Mr. Carrick has been with the company since 1985.