ABC: Construction input prices, contractor confidence up

Construction input prices rose 1.3 percent in January, according to an Associated Builders & Contractors (ABC) analysis of the U.S. Bureau of Labor Statistics’ Producer Price Index (PPI).

Nonresidential construction input prices increased 1.1 percent for the month, and they are up 4.9 percent since January 2022. Overall, construction input prices are 4.9 percent higher than a year ago. The 4.9 percent represents the smallest annual increase since January 2021, ABC says.

“Recent employment and retail sales reports indicate that the economy is not slowing nearly as quickly as predicted,” says Anirban Basu, ABC’s chief economist. “That is the good news. The bad news is that the economy remains overheated, a phenomenon neatly reflected in the January PPI data, which indicated that construction input price gains accelerated on a monthly basis. For instance, construction machinery and equipment prices expanded 3.4 percent in January and are up more than 12 percent during the past year.”

Basu says it is implied that the Federal Reserve will maintain higher interest rates. He adds, however, that the strength of the economy makes a recession more likely in the next year.

“At some point, higher interest rates will meaningfully affect economic activity,” Basu says. “With industry backlog high, according to ABC’s Construction Backlog Indicator, many nonresidential contractors will feel little to no effect from higher interest rates in 2023. But in certain construction segments and locations, these dynamics could make the next two years more challenging.”

Backlog, confidence shifts

ABC also reports that its Construction Backlog Indicator declined 0.2 months to nine months in January, according to an ABC member survey. The reading is one month higher than in January 2022.

Despite the decline in January, backlog remains elevated by historical standards and is 0.1 months higher than in February 2020, according to ABC.

ABC’s Construction Confidence Index reading for sales, profit margins and staffing levels, meanwhile, increased in January. All three readings remain above the threshold of 50, indicating expectations of growth over the next six months.

“Despite extremely elevated borrowing costs, worker shortages and a generally downcast economic outlook, contractor confidence rebounded in January to a level not seen since the first half of 2022,” Basu says. “Given the recent employment report, the U.S. economy continues to fend off recession. Some economists have concluded that rather than a hard or soft landing, the U.S. economy is headed for ‘no landing,’ meaning that economic growth will continue despite rising interest rates.

“However, the incredibly strong January jobs report makes it more likely that the Federal Reserve will maintain higher borrowing costs for a longer period,” he adds. “Eventually, that could cause the economic expansion to unravel, perhaps later this year. That could set the stage for diminished backlog and less confidence for contractors that specialize in privately financed projects as 2024 approaches.”