Construction Cost Mostly Down, Volatility Ahead

Construction costs, including for labor, material and equipment, fell again in August and led the IHS PEG Engineering and Construction Cost index into contraction territory.

The index value for August was 45.4, down from 49.8 in July, as the current materials/equipment price index also dropped under the neutral reading to 47.5, IHS Markit said. Seven out of 12 categories tracked in the index fell in August and reflected falling prices. Only ready-mix concrete and wire and cable had rising prices in August, while fabricated structural steel, transformers and electrical equipment had neutral readings.

“The drop in the materials/equipment sub-index highlights what we think will be a central feature of the pricing environment over the second half of the year: volatility,” said John Mothersole, research director at IHS Pricing and Purchasing. “Although U.S. growth looks solid over the rest of 2016, Chinese manufacturing activity looks unsustainably strong. Its eventual slowdown coupled with a U.S. interest rate hike in December will create headwinds for commodity markets and softening conditions in materials and equipment markets in the months ahead.”

The subcontractor labor index dropped significantly to 40.5 from 48.2 in July, marking the fourth straight month below the neutral mark, IHS Markit said. The Midwest and South saw notably soft labor costs; the Northeast stayed steady; and costs rose in the West.

“Despite tight construction labor markets, subcontractor rates have shown softness over the past four months,” said Emily Crowley, senior economist at IHS Pricing and Purchasing. “Driving this downturn is the decline in oil and gas investment, particularly in the U.S.”

- Nicholas Stern, editorial associate

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