Construction input cost analysis
Softening demand mellows input cost growth
Materials
Commodity costs have rallied in the first half of 2024 and global freight costs have been on an upward trajectory, growing by 283.4 percent on the year to the end of July 2024. Heightened geopolitical tensions and production issues have squeezed some commodity supplies, while Red Sea constraints have affected shipping lines, causing reroutes and delays.
This movement has caused an increase in US producer prices, which grew by 2.2 percent in the first six months of 2024. Normally, these issues would tend to influence construction material costs, yet they have only increased by 0.4 percent over the same period.
There may be a few explanations for this limited impact. On the supply side, the once fragmented construction supply chain has been rebuilding a resilient distribution network. While not fully recovered yet from its COVID-19 challenges, it is improving.
The demand side may be more prevalent, however. The economy has softened, and construction industry growth has eased. As a result of relaxing workloads, new orders for construction materials and supplies have been largely flat for the past 12 months. Fewer orders can equate to fewer price pressures and reduced demand growth might force manufacturers to absorb increases in material input costs to firm up revenue.
Source: Bureau of Labor Statistics and Census Bureau
This isn’t to say that construction material costs and the availability of components are no longer problematic, or price increases aren’t expected. Costs are elevated and shortages exist, particularly within in-demand sectors and buoyant markets, copper products have become costlier, and mechanical and electrical items have extended lead-in times.
There may, however, be a lag between the change at a global level and domestic construction material costs might be suppressed by demand constraints. Either way, a more benign material cost environment could help improve construction workloads.
Labor
Construction wages continue to increase and show no major sign of letting up in the short term. Average hourly earnings increased by 5.0 percent on the year as of Q2 2024, fractionally down on the 5.1 percent posted in Q1 2024. Skills shortages persist and firms continue to struggle to attract talent, often paying a premium in wages (the construction sector paying c.25 percent more than the wider industry).
Source: Bureau of Labor Statistics
Construction employment grew by 0.6 percent on the quarter in Q2 2024, with increases felt across all areas – residential, non-residential, civil engineering and specialty trades. Steady employment gains are supporting earnings growth, and more heat needs to come out of the labor market before notable changes emerge.
Construction job openings and hiring gains have recently been scaled back, however. Vacancies within construction fell for the second quarter in a row, dropping by 18.7 percent, with new entrants down by 10.8 percent in the same period. Workloads are still growing, opportunities are present and people are coming through the door at construction firms, yet the employment environment has calmed.
In turn, wage rate growth should eventually come down. However, this will take some time as earnings continue to be sticky amidst notable skills gaps. Workers are still able to be selective over employment opportunities and may hold bargaining power when entering package negotiations elsewhere. This is evidenced in part by industry quit rates increasing by 9.6 percent on the quarter in Q2 2024.
Machinery and equipment
Construction machinery and equipment costs edged up by 0.3 percent on the quarter in Q2 2024, with quarter on year escalation recording a 3.9 percent increase. While these values still denote growth, the quarter on year rate of change steadied to its lowest value since Q2 2021.
Steady demand and limited availability have seen costs grow for new and used construction machinery equipment, alongside leasing costs. Elevated interest rates have also contributed to increases due to growing financing costs, while operational costs remain tight. However, as construction sector growth alleviates and supply improves, further easement in machinery and equipment costs could materialize.
Cranes, generators and forklifts are following the general trend downward in terms of shallower cost increases, while excavator growth is still lofty as infrastructure workloads grow. Specialized machinery and equipment and general workloads in isolated areas of gains are also contributing to continued increases.
Source: Bureau of Labor Statistics
