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Impact of Inflation on Construction Readings Blog Feature

By: Michael Guckes, Senior Economist on June 13th, 2022

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Impact of Inflation on Construction Readings

In my recent article about non-dollar metrics, I described how the inflation-adjusted value of unfilled orders, new orders, and inventory are all at record current-day dollar amounts; yet when these readings are converted to 2019 equivalent dollars we actually see a decrease in inventories, new orders, and unfilled orders.

Given how hard all of you in the construction and manufacturing spaces are working, a bit more of an explanation is due as to how it can be that 2019 was a better year than now.

The first is that while business activity today compared to a year ago may be up 30%, 40%, or more in some instances, these results are in part possible for two reasons. The first is that the latest figures are being compared against year-ago readings which at the time were still reflective of COVID-19’s economic damage. In contrast, comparing the latest results in the construction space against those from late 2019 shows that the construction industry spent much of the last two and a half years merely making up for lost ground in 2020 and 2021.

Secondly, we may be failing to fully comprehend the cumulative impact of inflation—and especially inflation in the construction space—since late 2019. Monthly figures, such as the latest headline inflation reading at a 40-year high, fail to stress the cumulative impact of elevated inflation readings over time. Between December 2019 and May 2022 (2 ½ years), the total change in overall prices per the U.S. Consumer Price Index was 14%. This figure pales in comparison to the price rises seen in the construction space.

Over the same period, price inflation for construction materials has risen between 41% and 48%. In other words, construction firms are spending over 40% more money today for the same level of physical inventory as they were buying in late 2019. Below are four measures provided by the U.S. Bureau of Labor Statistics which measure the change in the price of construction materials. (All measures have been recentered where necessary to December 2014 = 100.)

The striking fact that looking at the numbers one way, and then looking at them another way, provides a noticeably different view of the same economy is why it is so important for business leaders to be very careful about not just what data they consume, but how they consume it. The failure to correctly perceive economic conditions correctly could be devastating for businesses in these sectors.



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