Posted March 3, 2020

AGC economist lays out Q1 2020 outlook

Coronavirus impacts loom but have yet to affect construction inputs or projects, reports Ken Simonson, chief economist at Associated General Contractors. 

The coronavirus outbreak continues to spread globally each day but the impact on U.S. construction remains speculative. So far, there do not appear to be any reports of cancelled, deferred or interrupted construction projects, nor of delays or shortages of construction equipment, parts or materials.

However, the disruption to Chinese production and shipping is increasing, adding to the likelihood that some construction products and projects will be affected. Bisnow reported on February 20, “‘For the first time this week I heard from two general contractors that they had materials caught up in ports because of the coronavirus—we’re starting to see some of that,” Hoffman & Associates Executive Vice President Maria Thompson said at a Bisnow event in Washington, D.C.” on February 18.

There have also been potentially beneficial impacts on construction. Crude oil prices have dropped by nearly 25 percent since January 1, which is likely to lead to further price declines for gasoline, diesel and liquid asphalt. Copper and steel prices are also likely to fall as Chinese demand slips. Interest-rate decreases may encourage home buyers, developers, and state and local bond issuers.

Construction costs continue to increase
Construction costs rose for the 40th month in a row in February, IHS Markit and the Procurement Executives Group recently reported. “Both the materials and equipment, and subcontractor labor indexes indicated continued price increases…Survey respondents reported increasing prices for 11 out of the 12 components within the materials and equipment sub-index, with carbon steel pipe pricing turning flat this month after dropping for five consecutive months….‘The coronavirus outbreak…has altered the outlook for raw commodities,’ said John Mothersole, director of research at IHS Markit. ‘Copper's outlook for the first half of 2020 has swung from one of deficit and rising prices to a potential surplus and weak pricing. However, price declines at the commodity level may take up to six months to filter through to semi-finished goods like wire and cable.’”

Produce Price Index (PPI) slowing
The Bureau of Labor Statistics (BLS) on February 18 posted producer price indexes (PPIs) for January, calculated from prices gathered in early January (before any impacts from coronavirus). AGC posted tables showing PPIs relevant to construction.

The year-over-year (y/y) rate of price increase slowed compared to a year earlier for both inputs to construction (up 2.2 percent y/y from January 2019 to January 2020, vs. 2.7 percent a year earlier) and new nonresidential building construction (up 3.7 percent, vs. 5.3 percent a year earlier)—a measure of the price that contractors say they would charge to build a fixed set of buildings. Increases in the latter index ranged from 2.9 percent y/y for new healthcare buildings to 3.2 percent for office buildings, 4.1 percent for industrial buildings, 4.6 percent for warehouses and 4.7 percent for schools. Increases in PPIs for subcontractors’ new, repair and maintenance work on nonresidential buildings ranged from 2.7 percent y/y for roofing contractors to 3.5 percent for electrical contractors, 3.9 percent for plumbing contractors and 4.3 percent for concrete contractors. The PPI for inputs to construction covers both goods (55 percent) and services (45 percent).

The PPI for energy inputs to construction jumped by 12 percent y/y. The PPI for nonenergy goods inputs edged up 0.5 percent; the index for services inputs increased 2.6 percent. Items important to construction with large 1- or 12-month changes include: steel mill products, up 0.3 percent from December but down 15 percent y/y 2019; asphalt paving mixtures and blocks, up 7.1 percent for the month and 1.1 percent y/y; and diesel fuel, down 8.1 percent from December but up 7.2 percent y/y. BLS posted annual updates of tables showing the relative importance of inputs to construction and of construction to overall PPIs.  

Highway Construction Cost Index increases
The National Highway Construction Cost Index (NHCCI) in September 2019 increased 0.5 percent from June and 6.4 percent y/y from September 2018, based on new and revised values posted by the Federal Highway Administration. The June-September change was a steep deceleration from the 5.5 percent increase between March and June, but the 6.4 percent y/y rise matched that of the previous 12 months. The index “is a quarterly price index intended to measure the average changes in the prices of highway construction costs over time and to convert current-dollar highway construction expenditures to real-dollar expenditures….The NHCCI covers the universe of the nation’s highway projects and arrive at an average cost index for all highway construction.”

Dodge statistics moving lower
“Total construction starts slipped 6 percent from December to January” at a seasonally adjusted annual rate, Dodge Data & Analytics reported on February 18. “All three major categories moved lower in January—residential building starts fell 8 percent, nonresidential building lost 6 percent, and nonbuilding starts moved 2 percent lower. With only one, limited month of data available for 2020, it is difficult to ascribe a 2020 trend. Some perspective can be gleaned, however, by examining a 12-month moving total. For the 12 months ending January 2020, total construction starts were 1 percent higher than during the previous 12-month period,” with residential building starts 1 percent lower, nonresidential building starts nearly flat and nonbuilding construction 8 percent higher.

Architecture Bills Index moves up slightly
The Architecture Billings Index inched up to 52.2 in January from a revised December reading of 52.1, AIAreported on February 19. The ABI measures the percentage of surveyed architecture firms that reported higher billings than a month earlier, less the percentage reporting lower billings. Any score below 50 (on a 0-100 scale) indicates a decrease in billings. Scores (based on three-month moving averages) topped the breakeven 50 mark for all practice specialties: mixed practice, 51.6, unchanged from December; commercial/industrial, 51.5, down from 52.0; residential (mainly multifamily), 51.2, down from 51.6; and institutional, 51.1, up from 50.3. All 2019 scores reflect an annual revision of seasonal factors