Presuming you are someone with a deep interest in the construction sector, probably due to its impact on your career (e.g., as an onsite worker, executive or GC/sub-trade staff member, or corporate analyst), there are many line items in the Bureau of Labor Statistics’ monthly Consumer Price Index (CPI) report that have meaning beyond just the top level figure, or what’s known as the ‘headline’ number.
Of course, with interest rates currently so high, driven there by an inflation rate that soared out of control for a while, it is the headline number that is the focus of most attention. June 2024’s year-over-year CPI increase was +3.0%, a far cry from the +9.1% in June 2022 that had the Federal Reserve so worried and reinforced its thinking that a super-tight monetary policy was warranted.
At +3.0% y/y, the all-items CPI-U rate (i.e., inflation for urban consumers) has eased considerably. Even better, the prices data series which the Fed is said to watch most closely, the personal consumption expenditures (PCE) index, has fallen to just +2.6% y/y. The PCE has been below +3.0% for six months in a row.
To all appearances, the Fed has an unofficial, but well publicized, target for inflation of +2.0% y/y and that goal is being approached. The likelihood the Fed will soon begin cutting its policy-setting interest rate, the federal funds rate, has soared and that is what stock market investors are counting on, and it explains the all-time highs being achieved by U.S. equity market indices.
Lower interest rates, of course, through lowering the cost of borrowing, will be a significant boon to construction activity. First out of the blocks will be a pickup in housing starts, stirring up and shaking loose the lull in residential construction that has prevailed for two years.
North of the border, the Bank of Canada has long operated with an acknowledged inflation target range running from +1.0% to +3.0%. Canada’s inflation rate in June was +2.7% y/y and it has been under the +3.0% outer limit in every month of this year. The nice success in beating back inflation in Canada, combined with an observed slowing in economic growth, has led to the Bank of Canada being among the first central banks globally to begin making interest rates cuts.
What else, though, is worth paying attention to in the latest U.S. CPI report? An obvious place to start, given its tie-in to the need for construction, is the ‘rent of primary residence’ line item. At its worst, a couple of years ago, y/y rent charges were approaching a double-digit percentage change. That shock has since been muted somewhat, but the rent sub-index of the CPI still remains elevated at +5.1% y/y. (In Canada, the ‘rental accommodation’ sub-index is +8.8% y/y.)
Lately, the singles versus multi-family residential construction mix in the U.S. has shifted back to the former. The exaggerated increase in rents, however, suggests there continues to be more potential work to be done in supplying accommodation outside the scope of home ownership.
Here’s another avenue (or runway) of interest. Among sectors expected to show the most robust growth in the years ahead is travel. Major airports in all of America’s biggest cities have huge expansions underway or being planned, with construction implications for passenger terminals, hangars, people movers, de-icing facilities, and so on. Regardless of the fact most people flying these days find the experience less than totally enjoyable, the -5.1% performance of the ‘airline fares’ sub-index in the CPI is only going to act as an incentive for embarking on more such adventures.
Given that so many of the largest construction projects currently, and for the next several decades, will reflect efforts to switch from fossil fuels to renewables, the price performances of alternative energy sources are fascinating to monitor. In June’s U.S. CPI report, gasoline was -2.5% y/y; piped utility natural gas, +3.7% y/y; and electricity, +4.4%. Gasoline prices, heavily influenced by world geopolitical events, are by far the most volatile of the major energy supply sources.
Finally, U.S. motor vehicle maintenance and repair costs in June were +6.0% y/y, contributing to an astonishing upwards push in motor vehicle insurance premiums of +19.5% y/y. Critics of electric vehicles, noting how expensive they can sometimes be to stay roadworthy, would say their increasing share of total market sales is a contributing factor. Those companies building all the new BEV assembly and battery plants in locations across the country will be keeping alert to this ongoing conversation.
Check out the latest month's construction starts in our Construction Economy Snapshot, along with trend graphs, regional starts data, and more.
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