Construction Costs Go Up or Down, Depending on How You Look at the Numbers

If you’ve been in the middle of a construction project, you might have noticed that some things seemed slightly cheaper. Depending on exactly which government Producer Price Index (PPI) numbers you looked at, they were.

Overall, the Producer Price Index for final demand—meaning average change in price for domestic producers of goods—increased by 0.4% in September, seasonally adjusted. That comes after declines of 0.2% in August and 0.4% in July, according to the Bureau of Labor Statistics.

“In September, two-thirds of the increase in the index for final demand can be traced to a 0.4-percent rise in prices for final demand services,” the report said. “The index for final demand goods also advanced 0.4 percent.” That was a month-over-month change. The unadjusted 12-month change was 8.5%.

“PPI inflation was above consensus in September and near Comerica’s more pessimistic forecast,” wrote Bill Adams, chief economist for Comerica Bank, in an emailed note. “Inflationary momentum has built up in the US economy and will persist near-term, keeping the Fed hiking aggressively. Leverage in the US economy is higher than in previous business cycles, so rate hikes will weigh on activity more than they used to.”

Those are the overall numbers and the prospect of continued high interest rate increases by the Federal Reserve are certainly bad news for commercial real estate.

But in one view for construction, things improved. The materials and components for construction category dropped by 0.4% between August and September, with materials lower by 0.4% and components, down 0.3%.

But here’s where the numbers can get confusing. Those are seasonally adjusted, which means economists have massaged them to take into account such factors as timing of holidays, the number of weekends in a month, weather, and school schedules.

If you look at changes over the last 12 months, a calculation that uses non-seasonally adjusted data, the materials and components for construction category was up 14.3%, which remains painful. The split out was 13.1% for materials and 15.2% for components.

Then there is final demand construction, and the 12-month change there was 23.1% (18.9% for government and 25.4% for private capital investment).

In May 2022, the number was 19.0%, which in January 2022, the 12-month increase was 16.1%. So, while a number of places are reporting the monthly drop in materials and components, when you look at the complete picture, it’s tough sledding.