Despite the fact the year-over-year all-items U.S. inflation rate has eased of late, to +2.4% in September, the cumulative increases in costs and prices since just before the COVID-19 pandemic set down in March 2020 remain hot-button topics.
As a starting point, know that CPI-U, the inflation rate for urban consumers, has risen by +21.4% over the past four-and-a-half years, dating back to February 2020.
Let’s look at an array of construction-related cost/price movements.
From the monthly Employment Situation report published by the Bureau of Labor Statistics (BLS), the cumulative rise in hourly wages paid to production and nonsupervisory workers in the construction sector since February 2020 has been +23.1%. The weekly earnings increase has been +25.6%.
For construction workers, including supervisory personnel (i.e., adding in bosses), the hourly rate increase has been +22.8%, and the weekly rate, +23.1%.
It’s apparent, then, that construction wages have been staying in line with inflation.
These percentage changes, however, place the recent tentative agreement (with final ‘inking’ delayed until after the Presidential election) reached by longshoremen and their employers at Eastern and Gulf Coast ports in extreme outlier territory ‒ i.e., a reputed +62% over six years, if the numbers appearing in the press turn out to be true.
It’s understandable that no one wants import entry points to be shut down, leading to a repeat of the severe supply chain shortages that arose a couple of years ago. But such a degree of earnings largess in one segment of the economy, if it spreads too virally to others, will leave the inflation specter as an ever-looming presence.
Over the (approximate) past half-decade, there have been some instances of very sharp increases in construction material costs. Recently, though, the pricing positions for many inputs have shown moderation.
In the next several paragraphs, the percent changes are based on producer price index (PPI) data generated by the BLS.
Whereas the price of softwood lumber was once up by double, it is now only +8.9% compared with February 2020. The cause for the pullback has been the weak homebuilding market (which, in turn, has resulted from a tight interest rate regime that only in the past month has begun to see an unwinding by the Federal Reserve.)
Many other input items continue to sit at lofty levels vs February 2020, including ready-mix concrete, +34.7%; cement, +37.9%; steel bars, plates, and structural shapes, +44.2%; insulation materials, +45.7%; paints and architectural coatings, +46.8%; gypsum, +47.5%; air conditioning equipment, +50.7%; and diesel fuel, +73.5%.
There are two indices in the PPI data series measuring the price movements of material inputs to new construction and they are presently both barely shy of +40.0% compared with early 2020. One of the indices includes many items but has a short track record; the other has a limited number of observation points but a long history.
The PPI’s ‘final demand construction’ index, which is essentially a ‘bid price’ index, is +36.5% when set against its February 2020 level.
The bottom line is that most construction-related costs and prices have been moving in a more exaggerated fashion than overall consumer prices.
This leads to the next obvious question, “What has been the dollar-volume record of construction activity over the past 55 months (i.e., since February 2020)?”
While some of the dollar-volume gains can be attributed to cost and price advances specifically contained within the construction sector, the overall increases will, I think, come as a pleasant surprise to many general and sub-trade contractors.
The seasonally adjusted dollar volume of total construction activity, now versus February 2020, is +42.3%. The ‘private sector’ component is +45.8%, while the public sector portion is +31.7%.
There were some years early in the pandemic (i.e., featuring interest rates at record lows) when residential work shot ahead at a rapid pace, explaining the better +48.1% climb in the residential put-in-place figure compared with the lesser +38.3% for nonresidential.
Among sub-sectors of construction, the largest percentage gains in dollar volume activity have occurred in manufacturing, +203.3%, and in effluent cleanup and potable water delivery, +70.4%.
At +203.3%, the dollar volume going into manufacturing construction hasn’t just doubled, it’s tripled (i.e., +100.0% would be a doubling). There’s been a concerted effort on the part of Washington to spur on American production-line capacity, especially in the computer chip-making realm, and clearly it is paying off; similarly for the push to shift auto sector capital spending into battery plants and the electric vehicle marketplace.
Let’s summarize. Since the month before the onset of the coronavirus contagion, consumer prices are up one-fifth to one-quarter. Likewise, for construction wages. Material input costs are ahead by two-fifths. The volume of private construction activity is ahead by nearly half.
Notwithstanding that homebuilding work is currently spinning its wheels, construction overall has been a star player in a U.S. economy that has suffered some setbacks and given financial market and academic analysts a headache or two over the last several years.
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