Constructor - September/October 2014 - (Page 45)

SIMONSON SAYS Cost of Supplies Not a Material Concern - for Now BY KEN SIMONSON CHIEF ECONOMIST AGC OF AMERICA There may be short-term price spikes or localized shortages of a few construction supplies, but most items should continue to be available at close to current prices. CONSTRUCTION HAS BEEN ON THE UPSWING for more than three years, yet materials costs have barely budged during most of that time. Although some contractors may be fretting that a round of price increases is about to beset them, there are reasons to expect the calm to last. Many contractors have bad memories from 2004 to 2008, when the industry was rocked by multiple, steep, unanticipated price spikes. Steel, copper, diesel fuel, asphalt, gypsum, plastics and lumber all had bouts of double-digit price increases. In addition, there were shortages or allocations at various times for items as diverse as wallboard, oriented strand board, asphalt admixtures and highway striping material. The rash of cost and availability shocks in that era reflected strong global growth, especially in China, and simultaneous expansion of residential, private nonresidential and public construction spending. For better or worse, conditions today are far different. China's economy is growing about half as fast as its previous peak rate, while other major economies are also growing more slowly or not at all. Thus,  @Constr uctor Ma g there is less global competition for materials. Meanwhile, the U.S. economy and construction spending are growing more slowly and unevenly. In addition, supply is much more abundant for many materials. High-capacity plants producing cement, gypsum and steel products have opened in the U.S. or elsewhere. Copper mines have opened or expanded. U.S. production of crude oil is rising, helping to keep a lid on diesel fuel and asphalt prices. There have fortunately been no major supply disruptions comparable to the damage Hurricane Katrina caused to natural gas wells and pipelines feeding Gulf Coast plastics plants in 2005. Within a few years, the U.S. should have much more plastics production. The broadest measure of materials cost changes is the producer price index for inputs to construction industries. This indicator rose more than 5 percent in both 2010 and 2011 but less than 1.5 percent in each of the following two years. In the 12 months through June, it went up 1.9 percent. Economists and stock-pickers overwhelmingly indicate the U.S. economic expansion will continue, and construction spending appears to be headed higher overall. High single-digit percentage growth appears likely for both residential and private nonresidential spending, which will more than compensate for another year of flat or slowly declining public construction. If the economy does evolve in that manner, there may be short-term price spikes or localized shortages of a few construction supplies, but most items should continue to be available at close to current prices. The construction industry is still more vulnerable than most to supply disruptions. Unlike consumers who can cut back on purchases of suddenly scarce or expensive items, or find substitutes for many, contractors are often locked into buying a fixed quantity of a particular product once they commit to a project, even if they don't buy the product for several years. For some items, there are only one or two suppliers available within a reasonable shipping distance. Despite these risks, construction has weathered many natural or manmade threats to supply in the past several years. These wars, floods, tsunamis and oil well blowouts have shown that contractors still don't need to put price shocks or supply shortages at the top of their list of "what keeps me awake at night." ◆ S E P T E MB E R / O C T O B E R 2 0 1 4 | 45

Table of Contents for the Digital Edition of Constructor - September/October 2014

Editor’s Note
President’s Message
CEO’s Letter
All for One and One for All
Elector Set
The Construction Advocacy Fund: Funding the Fight
New Revenue Recognition Standard Developed With Construction Industry Input
Business Development
Enhancing the Design and Impact of Company Websites
Construction’s Crystal Ball
Simonson Says
AGC in Action
Squeaky Clean Construction
Spray Polyurethane Foam: A Candid Look
Technology Toolbox
Legislative and Regulatory News
Member and Chapter News
2014 Insurance Directory
Government Affairs
Index to Advertisers
Final Inspection

Constructor - September/October 2014